{"id":344,"date":"2009-12-03T17:36:58","date_gmt":"2009-12-03T16:36:58","guid":{"rendered":"http:\/\/www.telekta.com\/blog\/?p=344"},"modified":"2012-07-25T13:17:56","modified_gmt":"2012-07-25T12:17:56","slug":"the-falacy-of-the-total-addressable-markets","status":"publish","type":"post","link":"https:\/\/www.telekta.com\/blog\/2009\/12\/the-falacy-of-the-total-addressable-markets\/","title":{"rendered":"The Falacy of the Total Addressable Markets"},"content":{"rendered":"

The Chinese Market fallacy in business planning….<\/strong><\/em><\/p>\n

\"Toothpaste\"Most every guide to a business planning process includes a section that describes the need for identifying the potential market size, sometimes called the total addressable market.\u00a0 The exercise usually starts with some governmental or Gartner-like information source to identify a global or regional segment.\u00a0 The planner is then instructed to make some assumptions that better restricts the addressable market, but typically the remaining market is still huge.\u00a0 Based on this information, inexperienced (or deceiving)\u00a0 business champions will compare their first few years cost against some percentage of this huge market as justification for proceeding with the business plan which I believe results in the common market penetration mistake I call “Chinese Marketing”.\u00a0 This is a term that I intend to push into the business vocabulary:\u00a0 “Chinese Marketing” is the fallacy that you can create a successful business based on getting a very small percentage of a huge market.<\/em><\/p>\n

The concept of Chinese Marketing comes from a hypothetical business case involving a business plan to market toothpaste to Chinese consumers.\u00a0 If there are <\/span>1.25<\/span> billion Chinese and all ultimately use ten tubes of toothpaste per year per person and each tube costs one dollar, then the Chinese toothpaste market should be about $<\/span>12.5<\/span>B\/year.\u00a0 If we create a toothpaste company and get only one tenth of one percent of the market, we have $<\/span>12.5<\/span>m in sales per year.\u00a0 Does it not then seem plausible that we could\u00a0 launch a brand and pay salesmen, and be profitable with revenue like that?\u00a0\u00a0 Actually no.\u00a0 The reality is that we will either get something over <\/span>10<\/span>% of the market or virtually none.\u00a0 More often than not, it is the latter.<\/span><\/p>\n

In <\/span>1981<\/span>, Jack Welch took over General Electric and discovered that only\u00a0 a handful of GE\u2019s <\/span>350<\/span> business units had become Number <\/span>1<\/span> or Number <\/span>2<\/span> in their respective markets.\u00a0 He also learned that it was the first and second tier businesses that were the profitable units.\u00a0 One of the main principles that brought GE back to powerhouse status was Jack’s ruthless focus on being Number <\/span>1<\/span> or <\/span>2<\/span> in every business market.\u00a0 If a division could not achieve Top 2 status, then GE would strongly consider exiting that market by selling off the division.\u00a0 In a similar way, I once worked for a VP of Sales who used to say that “markets want two strong players and one weak spoiler”. \u00a0 I am not sure where his wisdom came from, but I do see enough anecdotal\u00a0 evidence to repeat saying it myself.\u00a0 I somehow doubt that there is much profit to be made in digital cameras except for Cannon and Nikon.\u00a0 The others just work far too hard to get too little revenue.<\/span><\/p>\n

My third attack on Chinese Marketing is based on Malcom Gladwell’s “Tipping Point” thesis where he describes the need for a core, infected group before new ideas can spread to larger markets.\u00a0 This means you need <\/span>70<\/span>% of\u00a0 some sub-market before you can hope to get <\/span>15<\/span>% of a larger market.\u00a0 While this thesis was based on “new ideas” and not something as mundane as toothpaste, I would not be at all surprised to find that brand ideas behave like “new ideas” and again I see anecdotal evidence to support this.<\/span><\/p>\n

The correct approach to selling toothpaste in China is, I believe,\u00a0 to break the market into smaller units so that we can quickly reach a dominant state in one subgroup and then sequentially move to larger subgroups.\u00a0 Once we dominate our first, small sub-market we have “tipping point” behavior working for us and we are likely to have “Lynch #<\/span>1<\/span>+#<\/span>2<\/span>” [MATT: I DON’T KNOW WHAT “LYNCH #1+#2” IS.\u00a0 DO YOU MEAN LAUNCH #1, FOLLOWED BY LAUNCH #2?]\u00a0 profitability working for us.\u00a0 This first submarket domination success forms a stable state\u00a0 (a base camp in mountain climbing terms) that we can use to launch encore and derivative offerings that will gradually enlarge the size of the market we want to penetrate. In this way we can develop in cycles whereby each market push results in a new, larger stable state.<\/span><\/p>\n

An example:\u00a0 in the early <\/span>1980<\/span>‘s, a new bicycle front fork suspension was developed by Rockshox and sold to hardcore, off-road mountain bicyclists. \u00a0 This group was indeed a small market at the time, and the new market entrant dominated it.\u00a0 The total market of bicycles that could use a front suspension (as evidenced by nearly all bicycles having a front suspension now) is today huge.\u00a0 However, I suspect their market entrance business plan focused initially only on the hard core mountain bikers, then focused on high-end US recreational street bicycles, then European city bicycles, etc.
\n<\/span><\/p>\n

A business development plan needs to evolve.\u00a0 Total addressable markets are important for understanding that there is enough space for long term growth, but this long term growth must come from a series of\u00a0 successfully targeted market niches.\u00a0 Also don’t forget that target niches can be expanded by selling more product to the same niche and not just relying on addressing larger markets for the same product.<\/p>\n

In short, to enter a new market we must first focus narrowly and then adapt to the larger market as the product or service becomes successful.\u00a0 We then need to test different market niches and additional products applied to our existing niche and where we see signs of success, we focus.<\/p>\n","protected":false},"excerpt":{"rendered":"

Beware of any planning that assumes a small percentage of a large market. “Table Scraps” don’t exist in reality. Those with only a few percent of market share almost always loose money.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[4,3,11],"class_list":["post-344","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-managing","tag-selling","tag-strategy"],"_links":{"self":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/344","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/comments?post=344"}],"version-history":[{"count":10,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/344\/revisions"}],"predecessor-version":[{"id":433,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/posts\/344\/revisions\/433"}],"wp:attachment":[{"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/media?parent=344"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/categories?post=344"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.telekta.com\/blog\/wp-json\/wp\/v2\/tags?post=344"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}