Planning startup strategy leaves founders with plenty to think about. Getting proof of concept, hiring first employees, and knowing when to pivot are some examples. But startups should not lose sight of what is going on at the industry level. Industry growth can be a significant source of opportunity for startups, but it can also create major debtbergs that can sink them.
What should founders pay attention to in terms of industry trends and growth of the overall market? Often entrepreneurs want to think about a market in terms of straight-line growth that is linear over time. Unfortunately, market growth is typically more varied and hard to predict—particularly early in an industry lifecycle or in disruptive markets. Monitoring and understanding the industry growth trajectory can help startups better allocate resources and avoid debtbergs across the Titanic Effect oceans.
Industry growth variants are many and complex, and each market follows its own trajectory. However, three models roughly characterize different growth patterns with important strategic implications. They include:
The Bass Diffusion of Innovation
Crossing the Chasm
The Hype Curve
This is Industry Growth Pattern 1, and we will review the Bass Diffusion of Innovation model. We’ll tackle the other two models in the next two posts. After we’ve covered all three models, we’ll share ways to leverage these models in startup planning. So make sure you check out Industry Growth Pattern 3, the Hype Curve.
The Bass model is perhaps the most widely-known and accepted model of how new products get adopted. It is based on an S-curve and depicts three stages to market growth:
Relatively slow early adoption
Steady and significant growth in the middle time period
Slowing or maturing of the market in later years
Growth in unit sales and revenues in early years is generally low, as industry standards become established and customers learn how to incorporate the new product or technology. The speed of growth at this stage is based on the actions of early adopters, based on the coefficient of innovation called P. Speed of adoption here can be improved due to the nature of the new offering (think of the 10x better functionality some startup advisors advocate for), the number of people who love to adopt new products in this category, and advertising spend (how much the innovator advertises).
The market then hits a significant growth period in sales and unit volume, with standards becoming established, new entrants coming in, and differentiation emerging for market segments. Competition increases during this period. This stage is not influenced as much by the innovativeness of the product, but more about early adopters influence others to adopt. This is called the coefficient of imitation called Q. So it’s important to know your Ps and Qs when launching an innovative offering.
Following rapid growth, the market begins to cool off, and competitors often compete more on price. There is typically some consolidation in this phase with some weaker competitors going out of business or consolidating with larger competitors. Unless there is a new innovation that sparks a subsequent new growth curve, these industries stabilize and see growth that is equivalent to Gross National Product growth over the long term.
Markets for consumer goods from cars to computers to smart phones have followed this trajectory. Of course, the time for each phase of growth can vary substantially across product categories. Below is a typical Bass model, sometimes called the “S-curve.”
The Bass model has been studied a lot. A startup can forecast sales uptake using this model by looking for analogs. Researchers have estimated the Ps and Qs for more than 1500 new products. Others have analyzed patterns in these coefficients. So look at history – What previous products are similar to your new product? Use several products’ Ps and Qs to get a sense of the likely market growth. And think about how you can improve either coefficient. Can you increase innovativeness and find early adopters better? How can you spur on the word-of-mouth for imitators? You might even change the likely adoption curve. Know your curve, and try not to be limited by it.