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    December 18, 2018

    How to Size Your Market & Calculate a Customer's Willingness to Pay


    Issue: Incorrectly Sizing a Market Leads to Product Failure

    Market sizing is used to determine which markets are worth investing in. Companies use market sizing because they know that even if a product wins its market, it still may not be worth building if the market is not large enough to generate a sizeable return. The market size should be large enough to generate a return on investment that justifies the input cost. The first step in market sizing is defining your market.

    What is a market?

    The traditional way to size a market is to use a product-based market definition and a formula that looks something like: product price * number of buyers = size of market. But what do you do when your market sizing calculation leads you to invest in an existing product category that totally goes away when it is disrupted by a brand new invention?

    And how would you size the market for that new product category and know whether or not it’s worth investing in? Defining and sizing your market incorrectly can lead directly to product failure and missing enormous opportunities.

    In this post, we’ll show you how to avoid traditional market sizing mistakes by using Jobs-to-be-Done to size your market.

    Traditional Way: Incorrectly Sizing a Market Leads Directly to Product Failure

    Let’s look at examples of the traditional product-based market sizing formula.

    In 2007, you could have looked backwards at iPod Sales and seen that Apple sold 200 million units at a price of $150. Our traditional formula (product price * number of buyers) tells us that the iPod market was $30 billion and the MP3 player market was even larger.

    In 1990, you could have tracked sales of encyclopedias (Britannica alone sold 120,000) and identified a multi-billion dollar encyclopedia market.

    In 1996, Kodak’s revenues reached $16 billion as it dominated sales in the enormous film market.

    All of these market size calculations would have fooled you into making terrible business decisions.

    Kodak went bankrupt in 2012.

    Encyclopedia Britannica was sold for half its value in 1996.

    And in fact, Microsoft thought the MP3 player market was so attractive, that they invested in the Zune, which they eventually wrote down as a $289 million loss in 2007. With the launch of the iPhone, the MP3 player market went away.

    In 2007, customers didn’t want iPods anymore than they wanted records, cassettes or CDs. They wanted to create a mood with music.

    “Creating a mood with music” is a job your customers want to get done, and they hire products or solutions to do it. In fact, the MP3 player market never existed. “Creating a mood with music” is the market.

    The product-based definition of the market will lead you astray. On the other hand, markets defined with Jobs-to-be-Done will remain stable over time and give your team a clear target for innovation. Sizing your market based on the customer’s job will help you put a dollar value on new product categories your company should invest in that cannot be sized looking backwards at old product sales.

    JTBD Way: Using Jobs-to-be-Done to Size Your Market

    To size a market opportunity, don’t analyze the products currently in the market. Instead, analyze the customer’s willingness to pay to get the job done.

    So what is the customer’s willingness to pay, and what influences it? 

    The customer’s willingness to pay, also known as WTP, comes from the value that they derive from using your product. If they have a job-to-be-done that they struggle with, and your product can make their job easier or eliminate the struggle, customers may be willing to pay for your product. 

    Here’s how you can make a WTP calculation in 3 simple steps: 

    1. Define your market as a goal customers are trying to achieve (a job-to-be-done). An example of a job-to-be-done is “create a mood with music.” The related products such as iPods and DVD players in the past, or Spotify and Apple Music right now, do not qualify as customer jobs-to-be-done. They are the solutions to the job-to-be-done. 
    2. Identify the range of your customers’ willingness to pay to get that job done using interviews and surveys. For example, customers might be willing to pay anything between $5 to $1,000 per month to “create a mood with music” far more easily than they can today. 
    3. Don’t tally up all the answers to get a total willingness to pay. Instead, chart the answers on a scatter plot and draw a best fit line through the points that represent respondents' answers to your willingness to pay questions. The area under the curve is the size of the market. This will help you identify if the biggest opportunities are in the premium market or the low-cost portion of the market.

    Let’s dig deeper into WTP calculation with an example. What market sizing method would you use if you wanted to take share from Google Maps and Apple Maps? Keep in mind that the traditional market sizing formula would show us a market worth nothing because Google and Apple Maps are free ($0 * Billions of users = 0).

    Let’s try the WTP calculation method instead: 

    1. Define the market not as the ‘map app’ market (which would be product-focused) but as a job-to-be-done e.g. “get to a destination on time”.
    2. In interviews and surveys, ask people who need to get the job done how much they would be willing to pay to get to their destinations on time every time they tried to do it. Tip: Avoid focusing your question on the product. Focus on their job-to-be–done. 
    3. Remember, you’re not adding up the amounts to get the total willingness to pay. Chart the range of answers on a scatter plot and calculate the area under the curve.

    We actually tried this market sizing method at thrv and found a premium segment in the ‘get to a destination on time’ market worth $2 billion. These customers are willing to pay for a new solution because they cannot get the job done effectively with the existing solutions in the market. In other words, they have unmet needs in the job.

    Benefit: Make Confident Decisions in Your Product Investments

    When you have an idea for a new product, it can be hard to answer the question, “Is the market big enough for it?” when all you have is sales of existing products to size your market. Going by this information alone, you are also failing to mitigate the risk of a newer technology making your product obsolete before you have had a chance to earn sufficient ROI. If you use Jobs-to-be-Done and consequently the WTP calculation to size your market, you will be able to justify investments in new product categories that make your company the leader. When you use the WTP calculation instead of traditional market sizing techniques, instead of launching products like the Zune into markets that are about to disappear and recording losses, you will be focused on stable markets and be able to defend and win investments in products like the iPhone. You will accelerate your company’s growth. 

    Getting to the bottom of customer needs and maintaining a pulse on these needs as they evolve to figure out their willingness to pay might sound difficult, but what if you had a survey mechanism and automated insights at your fingertips? The thrv software puts WTP calculations and your customers’ unmet needs into your roadmapping prioritization process. The app automates the process of breaking down a customer’s job steps and customer needs, and there is a survey tool to identify which needs are unmet and each segment’s willingness to pay to get the job done. Product, marketing, and sales teams that use thrv can generate growth on three horizons:

    1. Short-term growth by creating marketing and sales messaging that connects your solution to the unmet needs of your customers and the leads in your pipeline.
    2. Medium-term growth by aligning your product roadmap with the unmet needs of your customers and the leads in your pipeline
    3. Long-term growth by aligning your product innovation with the unmet needs of new customers in the market 

    You can use the thrv software on your own, or engage thrv to join your team and partner with you to execute the work and accelerate your growth.

    Want to learn exactly how to apply the concept of customer willingness to pay to your product and company? Contact thrv today.

    Posted by Jay Haynes

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