Determining the Value of Ideas
Determining the value of ideas
by Marc Plotkin
Are you considering embarking on a new project? Are you hoping it will be widely accepted and "successful" (however you define that)? One of the hardest but most crucial phases in this process is the self-scrutinizing phase. The part where you prove to yourself that what you'll be building has the potential to be valuable in the way you want it to be. Based on albums and companies I've launched, artists I've consulted, and startups that I advise, I've created a five-point list that I recommend you filter your ideas through to best guarantee their value beforehand. I've seen countless people try to ignore even one or two of these and it never ends well. So let's walk through them.
The factors you can’t ignore...
- Market Size
- Monetization Strategy
- Behavioral Changes
- Execution Potential
Total Addressable Market (TAM)
Served addressable market (SAM)
target market (🙌🔥🏆)
These are important terms for zeroing in on your Target Market size. They go from largest to smallest, but also, least important to most important. The first number to calculate is your "Total Addressable Market." A term with a pretty self-explanatory title, TAM should encompass the total number of people involved in the general category of what you're pursuing. I'll give an example of this shortly. "Served Addressable Market" is a subset of the TAM, and should represent how many people within your TAM are utilizing something similar to what you're pursuing. And lastly, but most importantly, your Target Market should represent how many people within your SAM you are going to target (an age group, a geographic area, etc.). Defining a Target Market size may seem like the obvious first move, but the truth is that you can't accurately determine your Target Market size without first filtering it through your TAM and SAM. Additionally, going through this exercise of defining each of these categories independently, will hopefully keep you from over-catering to a larger group than you need to be. It's easier and more important to market to the smallest group that is most relevant to you, so avoid the temptation to focus (at least at first) on your SAM or TAM.
Let's start with an abstract but helpful example of this in action. Let's say I've created some widget, and I over-optimistically believe that the entire solar system is my addressable market. I'm going to be rich!
TAM = Friggin Huge! (the solar system)
...but then I realize that you have to be on a planet for my widget to work...this may be a smaller market than I thought. Not to worry, that's still a huge market!
SAM = Eight Planets (oh yea, this only works on Planets)
...but then I realize that only humans can utilize my widget, and as far as I know, they only live on Earth. So it turns out my Target Market is just Earth. 😞
TM = Earth (this requires people)
I admit that's a strange general example, but that type of deductive sequencing is what you want to apply to whatever (Earth-based) market you're exploring. It also hopefully illustrates that you may be quite tempted to believe your market is much larger than it is, and you must avoid this trap at all costs. Planet Earth is much smaller than the solar system, and if you know that your market is that much tinier than you initially thought before embarking on your project, you'll save yourself a lot of heartaches.
Let's try a specific example. Let's say I've created a new Digital Audio Workstation (DAW), the Pro Tools or Logic Pro killer if you will. Let's call it, "Marc Tools". Now when determining my market size, I may start off thinking that since this is something in the music industry, and the music industry is worth ~$25B, that my TAM is indeed $25B.
TAM = $25,000,000,000 (the music industry)
...but then if I'm being honest, the reality is that Marc Tools is only going to be used by the people in the music industry that actually utilize DAW's. That's certainly not the entire music industry. My Mom streams music on Spotify, but has never used a DAW, so my TAM is actually a bit misleading here. According to research, it looks like retail sales of DAW's, plugins, etc. is around $425M.
SAM = $425,000,000 (people that purchase DAW's)
...but the reality is that very few engineers switch DAW's frequently at all. In fact, most tend to stay on the one they master for many, many years. So knowing that, I may decide that I want to target music students who are first learning DAW's, and will then hopefully become long term customers of Marc Tools. There are ~400K collegiate music students in the United States, and assuming I retail Marc Tools for ~$299, my Target Market is looking like $119.6M
TM = $119,600,000 (Collegiate Music Students in the United States)
Believe it or not, either publicly or personally believing that a Total Addressable Market is an accurate portrayal of the size of a Target Market is something you'll likely witness other people thinking or saying. Falling for this trap is not only dishonest when providing metrics to potential partners, investors, teammates, etc. but it's quite literally taking the person(s) in the wrong direction.
Instead, what you want to be doing is framing what you're doing within the TAM...but not fool yourself into thinking that the TAM is the same number as your TM. Doing this self-audit is crucial in staying honest with yourself. As Richard Feynman said, "...you must not fool yourself, and you are the easiest person to fool." -- too many artists and entrepreneurs pull the trigger on some big project because they've convinced themselves the market potential is much, much larger than it is. Depending on your personality, this exercise may be the ultimate buzz-kill. Something you've gotten yourself very excited about can suddenly deflate when you see how much smaller of a number your Target Market is over your Total Addressable one. Disappointment or not, you want to live in reality.
Remember, that while you need to define your Total Addressable Market and Served Addressable Market to figure out your Target Market, once you know it, forget about the TAM and SAM and focus on your TM exclusively. It's the only one that matters in the end.
We can't talk about monetization strategy without also talking about audience size, and specifically the audience size you're planning on building within your Target Market.
Any time there are multiple variables involved in a strategy, it's important to think about their sequencing. In this case, you'll need to decide if you would rather focus on building a large audience right away, even if that means charging little or no money in the process of doing so, versus charging from the onset, even at the expense of growing your audience as large as it would otherwise be.
Let's look at some examples...
Let's start with the idea of audience-building for little to no money. Twitter is a fitting example of this.
Annual Revenue: $2.21 Billion
People Registered for Twitter: 320 Million
= ~$7 per person
When you think of all the server costs that Twitter incurs, all of their employees, their office space, and so on, you find yourself thinking, "$7 per person isn't very much..." -- but I would argue that they're worth far more than $2.21B. Why? Because while they may not have done as good of a job as other companies would at monetizing each person who tweets, they have done a better job than many businesses at building a tremendously large audience. Companies such as Microsoft, Google, Salesforce, and others, have been rumored to explore acquiring Twitter for between $15-$20 Billion. That's nearly 10x what they're earning today. It would make sense for those companies to pay a figure like that if they believe that they can make more per user than Twitter has been able to.
Next, let's explore the inverse of the previous example, the idea of monetizing early but having a smaller or slower-growing audience size. Tidal is a fitting example of this.
Costs: Either $9.99 or $19.99 per month
Subscribers: ~3 Million (Spotify has ~100 Million)
To use Tidal in any form, you have to start with a paid tier. Unlike their competitors, they've shied away from first building an audience via a free option. While we don't have all the information to prove causation (they're still a private company), when looking at their competitors who do offer a free option, the subscriber count differential is quite clear. Now, none of this is to say that Tidal is wrong in doing this. More than anything, this illustrates what a personal preference it is to opt for building a large audience for less money vs. a smaller one for more. For all we know, the smaller-size but 100% paid subscriber arrangement was Tidal's aim.
So, what are your priorities? Are you acting in accordance with the expectations of your partners, investors, or label? Deciding the right balance for you will come down to aligning all of the stakeholders' goals.
Also, don't forget you can always charge people later. Companies like Twitter or Facebook solely focused on building their audience size for years before monetizing their audience and collecting funds via advertising. We see this with artists as well. Chance the Rapper released his music for free on Soundcloud for years building up his audience before starting to monetize via paid streaming platforms, touring, and merch sales. If you can afford to focus on audience-building for a little while, nothing is stopping you from charging later.
The last thing I'll mention about determining the value of your idea as it relates to monetization is that you want to be clear on whether or not your project has fixed costs or if your costs will have variability based on your growth. For example, if I record a new album and spend $5K in doing so, those costs don't go up or down whether only 10 people hear the album or as many as 10 million people hear it. Once I record the album, I incur no more expenses when it's listened to. Conversely, something like an internet business can be entirely different. If I create a service that relies on rented server space (from something like AWS, Digital Ocean, Heroku, etc.) and the number of people using my service rises, so will my costs as the server company would charge me more. The variable-cost model is one situation where the "1K True Fans" strategy can break, unfortunately.
Regarding timing, I've found that the sweet spot you want to target is around three ideas. Two of them you can control, and one of them you can't.
The Sweet Spot:
Avoiding Public Distraction
Virtual Reality is currently having (another) moment of feeling like it's about to take off. The truth is though; it's had many, many moments like this. VR is hyped every few years, going back to the 1970's. I'm not going to make a guess as to whether or not it's here to stay this time, but we can use VR in its past iterations as examples of being completely too early. Before the current iteration of phone-based VR, the market had no way of realistically accessing this exciting new technology. You want to make sure your launch happens post market-accessibility.
Most of you reading this will recognize the above two groups. In the late 90's and early 00's, they ruled the world. They were selling millions of albums, and they had essentially created a category with the "Boy Band" phenomenon.
...but, do you recognize any of these groups?
After the success of NSYNC and Backstreet Boys, countless carbon copies popped up, seemingly overnight. The market was pummeled with the boy band sound until people not only stopped listening but openly started criticizing any group within the category. There was a complete backlash. The market was exhausted of this sound and anyone introduced to the world after those first two big groups was a goner. You must launch pre market-exhaustion.
The third idea regarding timing is completely out of your control, but it's something you want to be aware of so you have some sense of how you'd respond. I'll give a personal example for this one. A few years ago, a startup of mine had prepped a new version of its software to launch. We hired a publicist and had lined up TV and print interviews to promote the launch. The morning of the launch I woke up and checked the news to see there had been a horrific earthquake in Haiti. The emails started coming in that all of the launch interviews were being canceled or significantly delayed. Understandably, the news outlets needed to focus on the real-world emergency. If you believe that a significant piece of your idea's value is resting on the assumption that you'll have the public's attention when you want it, you may want to check yourself with the reality that you may run into a massive public distraction of which you have zero control. I was advising an artist who planned on announcing a tour on social media the week Donald Trump was elected. We decided it was best to wait a couple of weeks since 100% of his audience's attention was wrapped up in "something else" that week, and it wasn't something he was going to be able to siphon off at that exact moment. Again, this isn't an aspect you can control, but be aware of it, and as best you can, try to refrain from pursuing an idea that is completely at the mercy of it.
Are people already looking for what you're offering? Or do you need to first educate the public on what you're doing as well as pitch your specific offering? There are real pros and cons to each approach.
If I told you I was opening up a beachfront property business, it's unlikely you need me to explain to you what exactly that is. For the most part, people understand it; my job would just be to convince you that my company is the one for you. That latter piece, however, can prove difficult when your target market doesn't view you as a thought-leader in your space, but instead, views you as just another entrant.
Let's look at the opposite approach. When Dropbox launched in 2007, almost no one in the consumer world was actively looking for cloud storage. They weren't looking because most people didn't yet know what it was. In fact, so few people were searching for cloud storage that when Dropbox ran a campaign on Google Adwords, Google charged Dropbox $400 per person they were attracting. Apparently, Google knew how valuable the few individuals who were searching for cloud storage were to Dropbox, so they didn't make it cheap for them. As you may or may not know, Dropbox starts as a free product, with a premium option that costs $10 per month. So spending $400 per user was not exactly a scalable sales model for them. To circumvent this, they created an original and fun referral system where if a current user invited someone else who wasn't a user to the service, and they ended up signing up, each of those people would receive two gigabytes worth of free space added to their Dropbox account. This growth hack ended up saving them since it solved their growth challenges without costing them any money as well as actively engaging their users. That story had a happy ending; however, the efforts required since their offering wasn't even in a category that people were searching for were many times that of the beachfront property example.
When evaluating your ideas, consider if you'll just have to sell yourself, or also educate your market on what you're doing because it's completely new to them. The latter is often 200% the work of the former.
With every great album, book, film, or business, there are two crucial factors. There is the idea or vision, and then there is the execution of the idea or vision. Ideas alone can be very enticing, and even on occasion, your peers may laud you for your ideas to the point where it feels like you've taken action on them. You must try your damnedest to avoid this common pitfall.
I find the above chart a helpful reminder that even the best idea is worth nothing without excellent execution. With your idea, try multiplying the number you think is accurate in the "Idea" column by the number that you think is accurate for you in the "Execution" column.
No one likes to hear this part when they're excited about an idea, but...knowing that execution is where the real value comes from, you must self-scrutinize to evaluate whether or not you/your team have the execution potential required.
Now that said, as long as you've taken the time to do that honest analysis, there is nothing wrong with pursuing things that appear to be beyond your execution potential. In fact, it's quite literally what I've done my entire life. But I've learned that analyzing where I'm at before pulling the trigger is immensely helpful in giving myself the best possible shot. Without doing so, you won't know where you're vulnerable or misleading yourself.
So those five points again:
1 - Market Size
2 - Monetization Strategy
3 - Timing
4 - Behavioral Changes
5 - Execution Potential
Make sure you've filtered your idea through these points before jumping in. Good luck!