A useful insight into your market is its maturity stage. Note that in the image below the blue line represents the total market size, not that of a company within it.
Markets have lifecycles just like anything else, moving from creation to growth and maturity, and then to decline. All are profitable stages, and any type of company can be profitable in any stage, but there are some trends.
Growth Stage
In a very young market, growing rapidly, innovative products tend to do well. A higher spend on R&D, but falling R&D costs, mean access to capital is a key factor in defining who succeeds. Those who overcome any barriers to entry have a higher chance of doing well as even less well managed companies can find customers, as demand outstrips supply. New relationships between suppliers and customers can be made, so access is a valuable resource. If your company has a new innovation, is it creating or developing a new market? Can it? Conversely, if your market is growing and fairly new, is your product innovative?
During this time, larger companies will buy up smaller ones entirely.
Maturity
Once a market has matured it will have a high value and lots of competition between suppliers. Where customers are themselves businesses, competition between them will have pushed down prices and so profits. This means that opportunities here are focused around cost-saving and efficiency plays. Every extra percent of cost reduction represents a 20% increase in profit to companies with profit margins around 5%. Scalability and technology are frequent contributors to cost reductions.
A caveat here is that not all of a cost reduction will be available for a new company. As pointed out above, the customers will only buy if they are gaining some of that reduction. There’s a more nuanced point, also.
Imagine your product can save a hospital £1m per year in nurse time, by automating something for nurses. That £1m saving is a saving on the hospital’s Income Statement, which will be reviewed at the end of the year by the Trust that provides the hospital with money for nurses. But you are asking to be paid in cash, which must come from the hospital’s Cash Flow. In theory, the hospital would realise that the one is linked to the other. In practice, there may be one budget for acquiring automated products, and another for paying for nurses.
A saving for one may not mean authorisation to take a loss on another. This is especially true given that the saving won’t appear until the next funding year for the hospital, whereas you are probably asking to be paid much sooner. And that can be exacerbated by the fact that the hospital isn’t, in this case, going to lay off £1m worth of nurses- instead they will be reassigned to other work and there won’t be a saving on any of the financial statements. A Letter of Intent (template provided here) from an actual hospital telling you what they might actually pay could be a useful way to determine the actual market size in this case.
Decline
After a while a market will begin to decline slightly, and suppliers will start to exit the market as profits fall away. Larger companies that managed to scale enough to remain profitable- or just remain- will begin to buy up their upstream suppliers to guarantee their own supply chains, and also their downstream routes to market, in order to ensure their sales channels don’t vanish.
A period of mergers and acquisitions (M&A) will begin, often with large price tags funded by debt, and a few bankruptcies may occur. Lateral acquisition and vertical integration provide opportunities to support niches among customers, who may be frustrated by the new low-cost one-size-fits-all models being forced on them. But the biggest opportunity by now is for an entrepreneurial spirit to create something new and start the whole cycle again.