You hear it on Shark Tank all the time. “The market for xyz is millions of dollars. If we can get just 5% percentage of that market, we will make millions.” The sharks roll their eyes. What’s wrong with this logic?
The problem with this line of thinking is what I call the “fractional fallacy.” Basing projections for success on acquiring a small fraction of a large market, sounds great. But it is flawed logic.
The size of the market, and the idea that you only need to penetrate that market in a small way to succeed oversimplifies the challenges of starting a business. It ignores the fact that any new business idea has multiple variables. The size of the market isn’t the only thing that matters. In fact, it may be one of the least important considerations for initial success.
First, the product must be needed and wanted. These two variables tend to be binary. Either the product is desirable or it is not, at least for widespread adoption. And this may be the hardest aspect of starting a new business to predict.
Success relies on a number of variables that align in a way that the customer places value in what you have to offer. Then, and only then, is the market size relevant. If no one wants what your making, the billions of dollars flowing in the overall market is irrelevant.