The biggest error in planning may not be spreadsheet calculation error. Or cost estimation. It is most often missed assumptions about the market, the competition, the speed of adoption, or other critical metrics you’ve researched, or selected, or even just guessed at to create your plan.
Sources for your data
Where did you get the data to drive your assumptions of market size or market share? Most entrepreneurs quote a resource for market size but fail to then take the next step to eliminate all parts of that market unreachable by the company or product. For example, if you supply software to the chip design industry, do you segment your market into digital and analog users, into high end or inexpensive buyers, and into which languages or platforms users demand or request?
TAM, SAM, SOM? What is your market size?
You could be fooling yourself with market data. Are you trying to estimate TAM (total available market?) That’s likely to be completely unreachable for you with almost any amount of resources. And yet, some plan their futures upon a percentage slice of this, rather than…
SAM (Serviceable available market) which is is closer – the market you might be able to reach in your future and service effectively. And finally, there is the SOM – serviceable obtainable market, the one most likely to fit your planned resources and capabilities.
My story of creating a number for market size
[Email readers, continue here…] It’s easy to find someone to quote a size of market estimate. I became something of my industry’s source for such a number when I carefully catalogued the 160 players both domestic and international, estimated revenues from knowing the number of employees or installations for each (which were often public knowledge or stated by those companies.) I then created a gross domestic and gross international annual market size estimate for my industry’s products.
No-one challenged this number, and it became an unattributed source of the metric for market size for years. Perhaps there was no other way to project the size of that market. But many decisions were made within my company walls, and surely by competitors, based upon those numbers.
The “Gloves in China” syndrome
Then there is the famous entrepreneur’s statement about market share: “All I need to sell is one percent of the total available market to make this a rampant success.” We call that the “gloves in China” syndrome when analyzing assumptions within business plans. Without a trace of how the business will get that one percent, the entrepreneur confidently shows that this is all it takes to make us all rich. Even if the total number of annual units in a market is known, the leap to a percent of that market without a specific plan is often a fatal one.
Create an “assumption section” of your plan or spreadsheet
And these are just two of the many assumptions that underlie any business plan. At the very least, all assumptions should be driven by numbers separately listed in an “assumptions section” of the planning spreadsheet, allowing the reader to manipulate those assumptions to see the various outcomes, and challenge the numbers for the benefit of all who have to defend them.