In this article we look at market sizing and how this understanding benefits organisations.
As organisations grow, it increasingly becomes important to have an accurate view of the market they operate in to help:
Inform strategic decisions
Assess their own and competitor market share
Allocate resources effectively
Importance of having ‘one truth’
Within many companies it is not uncommon for people to have very different views of the market, especially when it affects them personally.
A valuable first step can often be defining a single view of the market that is then used throughout the organisation. Whether the market estimate is right or wrong is largely irrelevant at this stage, the real benefit of having ‘one truth’ comes from the consistency it brings to discussions, decision making and operations. In particular, it increases awareness of market generally, driving trends and the impact of competitor activity.
Linked to this the benefit of clearly allocating responsibility within the organisation to an individual or a team for updating and refining the ‘one truth’. In large organisations, it can also help to use a logo or identifier to demonstrate the information is from an approved source.
Unfortunately, there is no ‘one size fits all’ method and the approach needs to be adapted based on the availability of information. There is a wealth of information available for some industries and very little for others. Often the ideal source is simply not available, and a view of the market has to be pieced together and cross referenced using multiple sources including:
Trade associations, companies and other sources will publish market reports which can be ideal.
These can also be a valuable starting point if the information is not exactly what is needed.
In other situations, a proxy measure may be the best source. For example, there may not be a published report on the ‘plastic cork’ market, but a report on the wine industry gives a starting point that can then be refined.
In some situations, reports from other countries can help build the picture and validate the estimate.
Competitors and sales channels
Looking at the financial information of competitors and distributors etc. can also be valuable source of market information.
In reality, this is an over-simplification as small companies do not need to report their financials and large companies will often be engaged in a range of activities, not just the one of interest. This means a degree of manual adjustment is needed.
Understanding how many customers there are (whether this is be this specific demographics, number of households, airports etc.) provides another starting point for calculating the market potential.
Market Size Calculation Methods
Two main methods can be used to calculate market size and a company's accessible market potential:
Top Down Market Sizing: This is where a 'big picture' view of a market is used as a starting point and a series of filters are applied to give an estimate for the specific market. A simple example of this is taking a global market estimate and splitting it to a country estimate based on GDP.
Bottom Up Market Sizing: This uses the reverse approach, building up the estimate from the lowest point where the product can be used. For example, if a product is sold into hospitals, we could start with the number of hospital beds. Assuming we see a £5 average sales data, we can multiply £5 by the total number of hospital beds. As with the top down approach, further refinement is often needed, e.g. to account for different sizes and types of hospital as well as differences in bed use etc.
With both approaches, the estimate becomes more refined as more factors are taken into consideration ,e.g. accounting for differences in purchasing parity, oil component of GDP, local competition and selling prices, market maturity, brand awareness and value etc.
The choice of method is largely dictated by the availability of data, time and budget.
Ideally, both top-down and bottom-up approaches should be used to check the results align.
Accuracy of Market Sizing
Market sizing needs to be approached with the two things in mind:
Estimates of market potential will never be exact.
The estimate can be refined to be more accurate, but this increases both time and cost. Therefore, a balance needs to be struck between accuracy and cost
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