Several years ago a client asked me to read a business plan he had written to raise the funds needed to take his invention to market. The plan described a kind of helper spring to improve the handling of heavily-loaded pick-up trucks. In the marketing section of the plan, he referred to the market opportunity as “within the nearly $100 billion auto aftermarket.” When I asked what segment of that market was made up of pick-up truck parts, he had no idea. Nor had he researched what proportions of the total market derived from after-market accessories versus replacement parts or what percentage of pick-up trucks were subject to being overloaded. He made it clear that he knew that helper springs and all other suspension upgrades for pick-ups comprised a tiny fraction of the $100 billion. Still, he though that the big market size would impress potential investors.
Some years before, a woman had presented an idea for hand-embroidered sneakers as “tapping into the multi-billion dollar shoe market.” When I questioned whether that figure was genuinely relevant, she noted that athletic shoes accounted for more that a quarter of the total market. The sample pair that she had with her that day were red with floral embroidery. In that meeting, we discussed whether investors might be more interested in the market for hand decorated red sneakers than for shoes generally. I came to call her hyped-up market size reference the “Red Sneakers” problem. I wish that these were the only too examples that I knew about, but unfortunately, the Red Sneakers problem shows up in far too many business plans.
Red Sneakers market descriptions wave a red flag. It suggests that you are given to gross exaggeration, that you simply did not bother to do the necessary research and analysis to determine the size of the relevant market segment and/or that you do not know how to estimate the appropriate niche for your product. Each of these reflects poorly on the plan and the writer. The only market size estimate that makes any sense is one determined by the “100% of sales” rule. How many dollars in revenue would the company produce if it made 100% of the sales in its market segment or niche? Calculating that figure, even if it relies on a few (explicit) assumptions constitutes some evidence of sound business analysis; offering up overall industry figures is vacuous hype.
Of course, plans that then estimate their share of a Red Sneakers market are guilty of the further offense of “Chinese math.”
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Tags: 100% of sales" 100% of sales rule, appropriate market, assumptions, business plan, chinese math, exaggeration, hype, market estimate, market-size, multi-billion dollar market, red sneakers, relevant market, relevant niche, revenue