January 15th, 2010 | 
Author: How To Size An Emerging Market
In developing their business plans companies of all sizes face the challenge of determining the size of their markets. To begin companies must present the size of their relevant market in their plans. The relevant market equals the company’s sales if it were to capture 100 of its specific niche of the market. Conversely stating that you were competing in the 1 trillion U.S. healthcare market for example is a telltale sign of a poorly reasoned business plan as there is no company that could reap 1 trillion in healthcare sales. Defining and communicating a credible relevant market size is far more powerful than presenting generic industry figures.
The challenge that many firms face is their inability to size their relevant markets particularly if they are competing in new or rapidly evolving markets. On one hand the fact that the markets are new or evolving is the reason why there may be a large opportunity to establish them and become the market leader. Conversely investors shareholders and senior management are often skeptical to invest resources because since the markets do not yet exist the markets may be too small or not really exist at all.
In developing over 200 business plans for emerging ventures venture capital firms SMEs and Fortune 500 spinouts Growthink has encountered the challenge of sizing emerging markets numerous times and has developed a proprietary methodology to solve the problem.
To begin it is critical to understand why traditional market sizing methodologies are illequipped to size emerging markets. To illustrate if a research firm were to use traditional methods to size a mature market such as the coffee market in the United States it would consider demographic trends (e.g. aging baby boomers) psychographic trends (e.g. increased health consciousness) past sales trends and consumption rates price movements competitor brand shares and new product development and channels/retailers among others. However conducting such an analysis for emerging markets presents a challenge as several of these factors (e.g. past sales demographics of the customer when there are no current customers) dont exist because the markets are presently untapped.
The methodology required to size these new markets requires two approaches. Each approach will yield a different approximation of the potential market size and often the figures will work together to provide a solid foundation for the markets potential. Growthink calls the first approach peeling back the onion. In this approach we start with the generic market (e.g. the coffee market) that that company is trying to penetrate and remove pieces of that market that it will not target. For instance if the company created an ultra highspeed coffee maker that retailed for 600 it would initially reduce the market size by factors such as retail channels (e.g. mass marketers would not carry the product) demographic factors (lower income customers would not purchase the product) etc. By peeling back the generic market you eventually will be left with only the relevant portion of it.
The second methodology requires assessing the market from several angles to approximate the potential market share answering questions including:
- Competitors: who is competing for the customer that you will be serving; what is in their product pipeline; once you release a product/service how long will it take them to enter the market who else may enter the market etc.
- Customers: what are the demographics and psychographics of the customers you will be targeting; what products are they currently using to fulfill a similar need (substitute products); how are they currently purchasing these products; what is their degree of loyalty to current providers etc.
- Market factors: what other factors exist that will influence the market size government regulations; market consolidation in related markets price changes for raw materials etc.
- Case Studies: what other markets have experience similar transformations and what were the customer adoption rates in those markets etc.
While these methodologies are often more painstaking than traditional market research techniques they can be the difference in determining whether your company has the next iPod or the next Edsel.
About the writer:
As President of Growthink Dave Lavinsky has helped the company become one of the premier business plan development firms. Since its inception Growthink has developed over 200 business plans. Growthink clients have collectively raised over 750 million in financing launched numerous new product and service lines and gained competitive advantage and market share. For more information please visit http://www.growthink.com
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