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How to Size an Emerging Market |
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 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 ill-equipped 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) don’t 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 market’s 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 high-speed 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.
 Dave Lavinsky
As President of Growthink Business Plans, Dave has helped the company become one of the premier business planning 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.
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