Markets and Frameworks (and inversion)

How to effortlessly create a framework for understanding markets.

Markets are important.

So here, I’ll provide a simple way to think about them.

1. What is a market?

2. What drives a market?

3. How to think about markets?

#1: What Is A Market? People buying stuff.

That’s it.

Market size is important because it represents a ceiling for how many customers you can get. If you are a hair dresser in Ohio, you can only serve people living in or travelling to Ohio.

Simple enough.

#2: How To Develop A Market Framework

If you ask the right question, the answer becomes trivial.

And if you ask the wrong question, things become unbearably hard. For example: “what drives a market?” is a hard question. It’s too abstract. Hard to get a grip on.

Complex problems are usually easier to solve in reverse.

If you want to undertand markets, therefore, right question to ask is:

“Why would someone NOT buy a product”?

Try it out, and notice how trivial it is to think of reasons not to buy a product. It’s so much easier than asking the opposite. And much more powerful, as I’ll show in a minute.

For example, here are some reasons I would not buy product X.

• I don’t need it (doesn’t solve a problem I have)

• I don’t believe in it (even though it would solve a problem I have)

• It doesn’t deliver an ROI (customer value is less than price)

• I cannot afford it (even though it delivers value)

• I need to convince others (don’t have the authority)

• I need to run a process before I can buy (RFP or otherwise)

• I don’t resonate with the brand

• I cannot get it (it’s not within distribution reach)

• I don’t know about it

Here’s the crucial takeaway: any single reason would be enough for someone not to buy.

Markets are simply people buying stuff. Thus, the evolution of markets is determined by how quickly (if at all) these barriers gets broken down.

From here, creating a framework for markets is trivial.

For example, we can group the reasons not to buy into these buckets:

1. Customer value

   1. Does it solve a problem?

   2. Does it deliver more customer value than the price?

   3. Can it be delivered at a price lower than the customer value?

2. Process / dependencies

   1. Budgetary constraints?

   2. Process constraints?

   3. Authority constraints?

3. Distribution

   1. How will people know about it?

   2. How will you get it in peoples hands?

   3. How will you make it appealing?

   4. How will you convince people to try?

   5. … can all this be achieved at a cost below the lifetime value of a customer?

And have a relatively complete framework to think about markets and how they evolve.

#3: Using The Framework To Think About Markets

When we look at the reasons above, it’s pretty obvious why some markets grow fast, while others grow slowly.

It simply depends on the dominant barriers. For example, nuclear energy in the US constrained by “process time”, since it takes forever to be granted a licence - in addition to the time it takes to build the actual plant. Nuclear energy does not travel by word of mouth. Irrespective of the “business rationale” of Nuclear energy (which I admittedly know nothing about).

Constrast this to ChatGPT, which (I believe) is the fastest growing application of all time.

When ChatGPT came out it felt magical. Everyone told everyone. It was free to use and distributed digitally. In populations with access to the internet, there was no reason not to “buy” ChatGPT. No constraints. So it spread like wildfire.

The only constraint on growth seemed to be how fast people could tell others about it.

Contrast this to selling health care software to a municipality. The user you create the benefit for may not have authority to make a purchase. Further, they are required to run soul sucking RFP processes. The customer often don’t understand or don’t believe in what you are selling. And budget constraints adds another layer of friction. As a result, markets grow insanely slow - even for solutions obviously would create a ton of value.

By going through this framework, we can develop pretty reasonable takes on markets pretty quickly.

Conclusion

Understanding markets in strategy work is often about being directionally accurate

By asking “why would I not buy product X”, we can easily identify the constraints that shape how markets evolve. When we group these reasons, we arrive at a useful and reasonable framework for understanding markets develop and function.

In later posts, I’ll add the nuance of customer segment.

The TL;DR on customer segments is that customer variation is the equivalent of adding more barriers (because you need to solve the barriers for each segment).