The Art of the Spec Part 1
Define Your Market
Bright-eyed entrepreneurs with a product idea tend to dive into the deep end and start building immediately, without having a clear idea as to the scope or scale of their market. Knowing in detail who your customers are is key to building a coherent product that addresses their needs. Having a solid market definition also shapes your marketing and business strategy going forward.
Your priority should be producing a clear definition of your product’s market, comprising three distinct elements:
- Your business thesis,
- The definition of your addressable market, and
- Segments of that market who you’re targeting with the product.
The Business Thesis
You should be able to describe the problem you’re setting out to solve in one, or at most two sentences. The business thesis should communicate how your product will deliver value and, in general terms, who will benefit from it.
As an example throughout this series, we’re going to spec out a marketplace app. The problems addressed by our fictional app are twofold:
- Service providers lose money on under-utilised infrastructure while they grow, and
- Hobbyists and small business owners lack the infrastructure and capital to grow their product offerings in their early stages.
Turn these problems into a business thesis and you have:
Service providers are losing money on idle infrastructure which can be sold to hobbyists and small business owners through an online marketplace.
Defining your Addressable Market
By now we have described in general terms the two key markets for our product. Service providers, and early-stage entrepreneurs and hobbyists.
This isn’t granular enough if we want to build a coherent product. If we tried to address all of these markets the product scope would be enormous and building a solid brand around it would be impossible.
We need to determine the constraints that our product imposes on those markets to find out who our target customers are. Our primary constraints are on the service provider side, but there is one major constraint which applies to both markets.
Key Constraint: Both Markets
Requiring proximity between service providers and small businesses will limit the inventory visible on the marketplace. Our ideal customers run companies which can collaborate online, preferably on the platform itself.
Key Constraints: Service Providers (SPs)
- We’re selling their idle capacity. SPs need to respond to customer and internal demand quickly, so targeting SPs who utilise expensive tooling or need long lead-time is not viable.
- The overhead of vetting registered professionals on the marketplace would cripple our business. Our SPs must not require association membership and must have minimal legal liability.
Taking into account these constraints, our addressable market definition for service providers looks something like this:
Service Providers who can quickly respond to customer requests on-demand and can service multiple small customers with available excess capacity. They should have fast turn-around times and minimal supply-chain requirements. They must be able to operate without any in-person communication with the customer.
Our addressable market for small business and hobbyists is a little more vague, however we need to consider who can provide the kind of jobs our Service Providers can handle.
Small Businesses and Hobbyists who have small, well-defined jobs that can be fulfilled on-demand without the need to hold considerable stock on hand.
We’ve produced our definitions of the two addressable markets for the app. The next step is identifying the segments of this market that we want to target and profiling them. These profiles will inform the product strategy and design going forward.
Segmenting the Addressable Market
Once you have your addressable market defined, you need to build a list of the segments within that market which you can feasibly service. For our example, we’re initially only going to segment the service providers. Our chosen SPs will then inform the segments of the small business market which we target.
Create a spreadsheet (or use our template) and put each possible market segment you identify on its own row. Don’t worry about the specifics of each segment’s unique requirements at this point. We’re simply building a list of all categories of customer which fit our addressable market definition. Depending on the specificity of your product thesis, this list could range from 2–3 segments to 10 or more.
Here’s an excerpt from our example product’s potential SP market segments:
- Printers
- Photo Editors
- Copywriters
- Audio Editors/Producers
- Voiceover Artists
You can find the full list in the example worksheet in the resources section of this article.
Throughout the process of listing your segments you may have identified 1–2 obvious, complimentary segments which match your product vision. If so, fantastic! You’ve taken the first steps toward creating a successful digital product. Come back next Sunday to find out what comes next. Still undecided? Read on!
We’re going to use a few basic metrics to narrow down our list of all potential markets. These are the additional columns on the market segment worksheet.
Relative Complexity
Relative complexity is the simplest metric to evaluate. We’re going to read through our list of potential markets and pick the simplest and most complex markets to address. These are our 1 and 10, respectively. Go down the list, ranking the rest of the markets relative to those two anchors.
When identifying your high-complexity markets, consider compliance and regulatory issues, poorly defined business requirements, high geographic distribution or logistics overheads. If you can establish yourself in these markets with a comprehensive solution you can end up with a highly defensible product, but it will require much greater up-front investment.
Low-complexity markets have well-defined or minimal constraints, require minimal input from a potential customer and are typically repeatable, mass-market products or services. These markets are typically low barrier-to-entry, so your software product is likely to face immediate competition if you become successful.
Lifetime Value of the Customer
Estimating the Lifetime Value of the Customer (LTV) is important when identifying a target market and will inform your marketing strategy going forward. Markets with high LTV will require stronger customer relationships, but it’s easier to retain existing customers than find new ones. Think about whether your model is one-off or subscription-based, look at competitors in the space and evaluate the value that you’re bringing to the market.
Consider the revenue of the average customer in the market and how your product will contribute to their bottom line. Professional service providers or businesses in high-margin industries will typically have a higher LTV than artists or customers in commodity industries.
Don’t get hung up on getting an accurate-to-the-cent number here. We’re just looking to find out whether they’re $10, $100, $1,000 or $10,000 customers.
Market Size & Competition
These are the most difficult metrics to evaluate, since there’s generally not a handy database of market research for your specific product at your fingertips. Fortunately, Enrico Fermi beat us to the punch when it comes to accurately estimating things within a reasonable margin of error with little data to hand.
I’m going to run through the estimation process I used for evaluating Voiceover Artists as an example.
A quick Google tells me that total workforce size for the entertainment industry in the US (including events & hospitality) is about 1,677,500 production (non-supervisory) employees. This includes entertainers, musicians, screen and stage actors and our voice talent.
If you don’t have statistics at hand, make an educated guess at the approximate order of magnitude: are we talking 1,000 potential customers, or 100,000? Starting with a statistic just gives us a head start.
My first assumption is that 1–2% of those employees are actors of some kind. That leaves us with ~16,000–32,000 actors.
There’s no data on voice actors specifically, but let’s assume that voice talent is roughly equal to ~50% of the overall “actors” category, accounting for some overlap with screen or stage actors who also do voice, and for voice actors who aren’t included in the “Actors” statistic. Now we’ve got approximately 8,000–16,000 people in the Voice Acting category.
A quick sanity check of the Screen Actors’ Guild membership history (~200,000 members worldwide as of this post) tells us that our estimate is within the realms of possibility (and at least the right order of magnitude) for US-based Voice Actors.
There are about 320,000,000 people in the USA. That means voice actors make up ~0.0025–0.005% of the population.
If we want to target the Anglosphere, let’s assume similar percentages and calculate out our primary markets to the nearest million:
USA: 320m pop ≈ 8,000–16,000
UK: 63m pop ≈ 1,575–3,150
Ireland: 4m pop ≈ 100–200
Canada: 34m pop ≈ 850–1,700
Australia: 22m pop ≈ 550–1,100
New Zealand: 4m pop ≈ 100–200
Total Estimated Market Size ≈ 10,000
This kind of estimation will give us a ballpark answer within an order of magnitude and is usually remarkably accurate — and is certainly good enough for this stage of the process. We’re pretty solidly in the low tens of thousands.
You can use the same process for estimating your competition, or simply assign a relative score of high, average or low.
Once you’ve completed the worksheet, have a look at your results and look for the perfect intersection of mid-high customer LTV, a relatively small market size (marketing to a small-medium well-defined market is easier than marketing to the world) and low competition with complexity that suits your risk appetite. This will be your target market going forward.
Evaluating our example worksheet shows an interesting intersection between audio editors and voiceover artists. Taking it a step further and looking at our secondary market, which small business customers could benefit from their services? Small creative agencies who don’t have the volume to set up their own studios, but who want to bundle voiceover services as part of a bigger product offering!
So we’ve narrowed down our business thesis from:
Service providers are losing money on idle infrastructure which can be sold to hobbyists and small business owners through an online marketplace.
to a much more focused:
Voiceover artists and audio editors are losing money during idle time between big projects. Their time could be sold to small creative agencies on an online marketplace.
Check back next time when we’ll break down user archetypes, personas and get started with the fundamentals of user-centred product design. Take a look at the resources section below to see the progress of our product spec and to get your market segment worksheet template.
