Business Planning: How to Size an Emerging Market
by ,
President, Growthink
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.
Growthink develops
strategic business plans, conducts market research,
and builds financial models for growing ventures.
To date, Growthink has developed over 200 business
plans for clients who have raised over $750 million
in venture capital.
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