How Big Is The Market... Really?
by Mark Towery, Managing Director, Geo Strategy Partners
The correct way to estimate market size depends on four different cuts of market data. The first examines demand; the second defines the "addressable market." Following that is analysis of the realistic opportunities for competition, and finally a targeted selection of "winnable" market opportunities. Geo Strategy Partners explains the process of determining market size to assess potential opportunities in this article.
One of the first steps to a market opportunity analysis is to size the market. A simple enough process, it would seem. Internet sites and syndicated reports are full of industry statistics. Government agencies collect and publish volumes of data; industry associations and trade journals are prolific purveyors of articles and monoliths teeming with industry information. How big is the market is a simple enough question but the answer is more complicated that it appears.
We’ve all heard the story of the two shoe salesmen who traveled to Botswana at the turn of the last century. One of them returned dejected and reported that there was no market opportunity because natives didn’t wear shoes. The other returned elated that 100% of the market was available for capture. How big the market is depends to a large degree on how you define it.
We typically look at market size in four different cuts of the data. The first is what we term the “demand determinant market” or the market of overall demand that will dictate the size of the “addressable” target market. Within the addressable market, we then need to be realistic about where our client can realistically compete today in terms of existing capabilities and capacity. A larger portion of the market may be feasible later after making investments in capital equipment, personnel, or expertise, but for now, they are not “viable” opportunities. Finally, we get to a full competitive analysis to estimate the market share that can be captured in the near term or the “winnable” market opportunity. Ultimately, all this must be in the context of the industry environment.
Let’s take a look at each of these dimensions of market definition using the example of film encapsulant for solar applications.
You cannot address the encapsulant market without first determining the potential for the solar market. The solar market demand here would be the Demand Determinant Market which defines the overall market opportunity for solar encapsulants. In many cases, we need to go one step higher and examine the overall economic environment to make an informed prediction about the demand determinant market. Often, this involves a sensitivity analysis of the demand determinant market assuming various scenarios in the economic environment.
For example, on a recent project were needed to determine the market size for pressure vessels in the ethanol industry. Our first step was to estimate the demand for ethanol. In order to predict the demand for ethanol we created a sensitivity model that predicted the demand for ethanol under various scenarios based on changing variables such as the price of oil, government subsidies, taxes, price of corn, economic growth rates, etc. In all we had twenty determining variables just for the economic environment in order to determine the demand for ethanol in order to begin to define the “addressable” market for pressure vessels in this industry.
The “addressable market” is further defined by gaining perspective on market size and potential through the eyes of customers and competitors and suppliers of adjacent product and solutions. It is also calibrated by looking at alternative as well as substitute solutions. When this process if fully vetted, we can say we have defined the “addressable” market or the total market opportunity for our company.
This step is even more involved when we are introducing a new product or solution. In this case we need to determine the delta increase in value created by our new product or solution over the existing status quo of the industry. Then, some assumption about the utility that customers would perceive from this value and be either willing to pay a premium for or switch from existing products. In effect with a new product, we are hoping to create a new demand that will grow the overall market or cannibalize part of the existing market.
Illustrating the complexity of defining the addressable market is a recent project we performed to determine the addressable market for a new metal coating for knives, saws, and blades in the Pulp and Paper and Printing industries. We first had to determine the overall demand of for the pulp and paper industry including an environmental sensitivity analysis. Then, we had to determine the market for the various knives, saws, and blades. But because our client was selling coatings not blades, we then had to develop a fairly complex model to determine the incremental value of our client’s coating to the state of the industry. We then converted this value into an assumed price point; all just to determine the addressable market.
But we need to be realistic about which portions of the addressable market we can compete in today. Due to capacity constraints, capability limitations, specialized expertise, or lack of human or other resources, chances are the entire addressable market is not within our immediate reach. We might decide that due to economies of scope, we would not address international markets initially but only the U.S. We might decide our solution was more likely to be adopted by pulp and paper companies earlier than printing companies and choose to focus there in the near term. Such decisions define the viable market - that portion of the market in which we can realistically compete in the near term.
Finally, we must conduct an honest assessment of the competitive environments to determine what portion of the viable market we can realistically expect to capture. This is where the voice of the customer and competitive intelligence come into play. It is ultimately about our ability to craft a compelling value proposition and deliver that value effectively and competitively. But in order to make key business investment decisions, we must first be able to estimate that success in order to be able to calculate a return on investment.
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