Market Risk
Part Of
Reduced By Practices
- Demand Management: Aligns production with market demand, reducing the risk of under or overproduction.
- Design: (Research and) design allows you to leapfrog competitors and provide new sources of value.
- Fundraising: Allows the startup to invest in market research and customer acquisition.
- Marketing: Promotes the software to reach potential customers and increase market share.
- Prioritising: Ensures that the most valuable features and opportunities are addressed first.
- Release: Delivering features means you get market feedback.
- Sales: Increases market penetration and customer base.
Attendant To Practices
- Outsourcing: Increasing the size of the supply chain introduces risks that the state of that supply chain changes with the market.
- Prioritising: Prioritising a single client or narrowing scope reduces diversification, increasing exposure to changes in the market.
Market Risk is a term from finance:
"Market risk is the risk of losses in positions arising from movements in market prices." - Market Risk, Wikipedia
I face market risk when I own (i.e. have a position in) some Apple stock. Apple's stock price will decline if a competitor brings out an amazing product, or if fashions change and people don't want their products any more.
This risk applies equally well when building a software product, as the software you're building is effectively your stock and its value is whatever the market places on it (i.e. what people are willing to pay).
Even projects that are internal to a company are not immune: they still need to have a value to the company and therefore suffer Market Risk. If you have multiple internal customers for your software or a single highly important internal customer, you will be less exposed to internal market risk.
Since the market decides what it is prepared to pay, Market Risk tends to be outside your control. Although, as shown in the diagram, you can use tools like marketing to try and engage with your market and get them to see the value in what you are doing.
Worked Example
In the above diagram, a successful Software-as-a-Service (SaaS) company has found a niche with some high-value clients. While this means they don't suffer Funding Risk, they are susceptible to the whims of those clients. In order to reduce the Market Risk, they decide to engage a marketing company to help them find new clients to work with, potentially in an adjacent domain.
The wider client base reduces the life-threatening impact of one of the original clients leaving, but these new clients require additional functionality in the software, increasing it's complexity and absorbing more of the development budget.
Example Threats
1. Technological Disruption
Threat: A competitor releases a product that eats into your share of the market, or creates some innovation that renders your product obsolete.
2. Changing Market Fundamentals
Threat: Factors such as interest rates, inflation rates and exchange rates may all affect the financial health of your software.
3. Not Listening To The Market
Threat: It's easy to ignore the wider market moves and hope that they are background noise. Not paying attention to how (potential) customers are behaving in the market may lead to surprise.
4. Financial Leverage
Threat: Taking on too much debt (i.e. borrowing too much) increases market risk as creditors expect to be paid irrespective of market conditions.
While not a traditional software company, WeWork (a provider of co-working spaces) nevertheless branded itself as one and was able to borrow heavily against its "tech" image. They relied on high levels of debt for rapid expansion which raised eyebrows at the time it filed for IPO in 2019.
However, in 2020, the COVID-19 pandemic hit and led to a massive shift to remote work, leading to the CEO, Adam Neumannm, being ousted for poor financial discipline. The New York Times called this "an implosion unlike any other in the history of start-ups".