## Co-Founder AI

# How to Conduct a Comprehensive Market Analysis When Choosing a Niche

Selecting the right niche is crucial for the success of any startup. The first step in evaluating a niche is to determine if it is financially viable. If the market lacks potential, it’s best to avoid investing time and resources into it. This initial phase involves desk research—searching for existing studies and statistics available publicly, identifying primary sources, and compiling useful data and relevant links into a single document.

## Market Size and Growth Dynamics

Before diving in, it’s essential to understand the market’s size and the portion of it your startup can realistically capture. There are five key metrics that investors always look for in a pitch:

1. Potential Available Market (PAM): This is the theoretical maximum market size. While it may not be entirely realistic, it serves as a comparative measure. Research how many people face the problem your product solves, multiply by the average annual spending per person on solving it, and add the market’s growth rate over the past 3-5 years.

2. Total Available Market (TAM): This represents the total revenue opportunity available if you achieve 100% market share. Look for existing studies to find out how much money people are currently spending to solve these problems.

3. Segmented Addressable Market (SAM): This is the portion of TAM targeted by your products and services which is within your operational reach. Identify key competitors offering similar products, check their annual revenue on platforms like Owler, and sum them up. If there are no direct competitors, explore the concept of the “visionary’s trap.”

4. Serviceable Obtainable Market (SOM): This denotes the portion of SAM that your company can realistically capture. Determine your revenue potential based on a feasible marketing strategy over the next 3-5 years. Analyze how you will acquire customers, calculate marketing expenses, and assess the potential of your chosen marketing channels.

5. Compound Annual Growth Rate (CAGR): This metric shows the year-over-year growth rate of the market over the past 3-5 years. It can often be found in public research. If unavailable, use the trend of key search queries as a proxy.

## Preconditions for New Opportunities

Why is this project timely? Identify any changes in the market that allow you to outperform existing competitors launched 3-5-10 years ago. Have new technologies emerged? Have there been significant regulatory changes?

## The Influence of Supra-Systems

What pressures might external organizations exert? Consider any regulations or licensing requirements that could impact your business. For example, launching a product aggregator in 2024 might require navigating pressures from large companies like Google Ads or Facebook, which could launch their own aggregators and potentially sideline other aggregators in search results. Additionally, new laws could mandate expensive data sharing with advertising operators, making your business model unsustainable.

Allocate 4-8 hours to thoroughly analyze the market.

## Example

Imagine you decide to launch an online aggregator for psychologists.

Market Size and Growth Dynamics:

• PAM (Potential Available Market): $3.41 billion
• TAM (Total Addressable Market): $1.06 billion
• SAM (Serviceable Available Market): $24.29 million
• SOM (Serviceable Obtainable Market): $11.21 million
• CAGR (Market Growth Rate): 10% annually overall, 14% online

Preconditions for New Opportunities:

• Emergence of AI Technologies: AI can transcribe online consultation results and create additional value-added services.

Regulatory Features:

• Since 2014, there have been increasing attempts to regulate the industry.
• A proposed law would:
  • Only allow licensed psychologists with higher education to practice.
  • Require psychologists to undergo additional state certification, internships, and membership in professional organizations and a unified state registry.

Footnotes:

1. Calculating PAM:

   • 15% of the country’s population requires psychological assistance. With a global growth rate of 8% annually, this increases to 22% over 5 years.
   • Population: 100 million, decreasing to 95 million.
   • LTV (Lifetime Value): $65.37, increasing to $114.82 with 12% inflation.

2. Calculating TAM:

   • 13% of the population currently seek psychological help.
   • Population: 100 million.
   • LTV: $65.37.

3. SAM:

   • Total revenue of online psychological aggregators in 2023.

4. Calculating SOM:

   • SEO: 7.6 million queries.
   • Targeting 5% traffic = 380K visits.
   • Conversion rate 3% = 11.4K clients/month, 136K clients/year.
   • Paid traffic = 50K visits/month, conversion rate 7% = 3.5K clients/month, 42K clients/year.
   • Total: 178K clients/year × $65.37 (LTV) = $11.64 million.
   • Retained revenue: 10% = $1.16 million/year.

5. Growth Trend:

   • Shift in perception among the 40+ generation towards psychology, making the younger, more open generation a significant growth driver.

## Conclusion

Now you know how to conduct a comprehensive market analysis in 4-8 hours. The next time you plan to launch a new startup or business, you can refer back to this article, perform similar calculations, and use the obtained figures to make more informed decisions.