Published on February 26, 2014
Ins and Outs of Sizing a Market in No Time Last Updated on: October 25, 2013
Table of Contents • Overview on Science of Market Sizing • Understanding How to Think About a Market Opportunity • Total Market Potential • Total Addressable Market (TAM) • Segmented Addressable Market (SAM) • Expected Share of Addressable Market (ESAM) • Opportunity Size Triangulation – 3 Ways to View an Opportunity • What’s The Difference Between Top-Down and Bottoms-Up Approaches • 7 Quick Market Sizing Approaches • Quick Top-Down Market Sizing • Analyst Spend Statistic Market Size • Census-Based Market Sizing • LinkedIn-Based Market Sizing • Directory-Based Market Sizing • Power Curve Market Sizing • Resource Constraint Angle on Sizing
Overview on Science of Market Sizing 3
Understanding How to Think About a Market Opportunity • 4 ways to think about market size. Knowing the level of detail necessary to address your concerns is key to properly scoping the problem and approach. 4
Total Market Potential • Definition: The potential sales value of a particular product or service within a specific target segment over a specified time frame. – How is it calculated? • Total Market Potential = (# of Opportunities) x (Average Selling Price of Opportunities) • Best to do this calculation at segment by segment level, not as an overall market. – Important Assumptions: • Company can win 100% of market opportunities. • All opportunities within market are there for the taking. • Price is consistent across market. – Costs & Benefits: • Statistic can be estimated in hours, not days. • Useful for quickly understanding the potential for a B2B market opportunity in terms of magnitude. • Always grossly overstated, due to over-simplification. 5
Total Addressable Market (TAM) • Definition: The potential sales value of a specific target segment over a specified time frame that takes into consideration the available demand for a particular service or product. – How is it calculated? • TAM = (# of Opportunities) x (% Targetable Opportunities) x (Average Selling Price of Opportunities) • Targetable opportunities can be estimated via a market research survey or an assessment of current market penetration. • Best to do this calculation at segment by segment level, not as an overall market. – Important Assumptions: • Company can win 100% of its targetable opportunities. • All opportunities within targetable segment are there for the taking. • Price is consistent across all segments and customers. – Costs & Benefits: • Provides more realistic picture of market opportunity than total market potential. • Always overstated • Statistic can be estimated in a day or less if willing to use publicly available data to estimate percentage of targetable opportunities. 6
Segmented Addressable Market (SAM) • Definition: The potential sales value of a specific target segment over a specified time frame that is limited to available demand for a particular service or product that can be addressed via a specific business model and strategy. – How is it calculated? • SAM = (# of Opportunities) x (% Targetable Opportunities) x (% Opportunities Targeted as Part of Business Model) x (Average Selling Price of Opportunities) • The segment or business model addressable opportunities can be estimated via more targeted market research. – Important Assumptions: • Opportunity tomorrow is same as opportunity today. • Company can win 100% of its segmented or business model addressable opportunities. – Costs & Benefits: • Provides a more accurate estimate of actual revenue potential of a market or segment. • Requires a more involved process, as you have to understand what percentage of the market would be addressable via your business model. • Inputs into calculation are difficult to come by and may require primary research which can be very costly and time consuming. 7
Expected Share of Addressable Market (ESAM) • Definition: The portion of the segmented addressable market sales value expected to be won, due to a given produce or service, over a specified time frame. – How is it calculated? • ESAM = (Expected Win Rate) x (Segmented Addressable Market) x (Average Selling Price of Opportunities) • The win rate can be proxied by win rates in other similar segments or estimated via market research. – Important Assumptions: • Opportunity tomorrow is same as opportunity today. • Win rates are same across segments. • Opportunity tomorrow is same as opportunity today. • Price is consistent across all segments and customers. – Costs & Benefits: • Statistic provides most accurate estimate of actual market opportunity. Although typically understated. • Inputs into calculation are difficult to come by and may require primary research which can be very costly and time consuming. 8
Developing a Clear Market Definition • What is a Clear Market Definition? – A series of externally identifiable characteristics that identify the group of companies who would likely have a need for product/services and could reasonably be expected to consider purchasing product/service or a competitor’s product/service within a given time frame. • 6 Key Factors To Consider When Developing a Market Definition: Relevant Good/ Service Minimum Viable Opportunity Opportunity Limitations Market Definition Costs Resources Legend Business Factor Timeframe Outside Factor 9
Opportunity Size Triangulation – 3 Ways to View an Opportunity Top-Down: Percentage of total revenue in current market Opportunity Size Resource Constraint Sizing: Ability and cost to serve market within time and resource constraints. Bottoms-Up: Customer or competitor customer spend on this category 10
What’s The Difference Between Top-Down and Bottoms-Up Approaches • Its all about how you view the market and what this enables you to see or prevents you from seeing. 11
7 Quick Market Sizing Approaches 12
Quick Top-Down Example • Question: What is the market size for commercial printing services? • Who are their target customers? – Can we bucket each profiled customer by industry or another easily identified attribute? – Is there a minimum employee or revenue threshold to afford or need these services? • We can use analyst firm IT Spend Statistics to figure this out. • Minimum Revenue = Average Sales Price (ASP) / (% Revenue Spent on IT * % Allocation of IT Budget Towards technology Area * % Take of Technology Allocation ) • How many companies are in each of these target industries with the specified characteristics? – We use CapitalIQ, Jigsaw.com, LinkedIn. 13
Quick Top-Down Example Continued • How much will customers be willing to spend on printing per a year? – Can we estimate this from their current customers? – If not, can we approximate number using publicly available competitor data? • Key: Must be uniquely focused on space or breakout revenue in financial reporting. • CapitalIQ and 10-ks are great sources for customer and revenue. • We have a range, so conservatively estimate a high-end ($500k) and low-end ($200k) • Putting it all together to calculate a market size: 14
Analyst Spend Statistic Market Size Example • Question: What is the market size for disaster recovery services for a company who sells to utilities and charges a minimum of $1,000 per a month for this type of service? • What is minimum revenue for utility that would be likely to purchase DR services at this price point or higher? – We can use analyst firm IT Spend Statistics to figure this out. • Gartner overall spend statistics • Forrester DR/BC IT Spend Allocation Report – Minimum Revenue = Minimum Sales Price / (% Revenue Spent on IT * % Allocation of IT Budget Towards technology Area * % Take of Technology Allocation ) – Minimum Revenue = ($1,008*12)/(.062*.013*1.00) = $15,000,000 Allocatio Company Annual Revenue Inputs Basement $5,000,000 $10,000,000 $15,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $75,000,000 $100,000,000 Employee Count 0.9 Allocation of revenue to IT budget (Utilities) 6.2% n of IT budget towards 1.30% Target "take" % 100% Monthly Service Price Can Afford 12 6 11 17 22 33 44 56 83 111 $310,000 $620,000 $930,000 $1,240,000 $1,860,000 $2,480,000 $3,100,000 $4,650,000 $6,200,000 $4,030 $8,060 $12,090 $16,120 $24,180 $32,240 $40,300 $60,450 $80,600 $4,030 $8,060 $12,090 $16,120 $24,180 $32,240 $40,300 $60,450 $80,600 $336 $672 $1,008 $1,343 $2,015 $2,687 $3,358 $5,038 $6,717 15
Analyst Spend Statistic Market Size Example Continued • How many utilities generate less than $15 million in revenue per year in the United States? – Looks like there are a couple good sources to make estimate: LinkedIn, US Energy information Administration – Need to convert revenue into an employee count to use LinkedIn. This can be done using an industry revenue to employee multiplier. Source Number of Utilities Confidence LinkedIn 1309 Medium US Energy Information Administration 1,225 High Best Estimate 1,225 High • We can estimate total market opportunity without ASP since we have a canonical revenue list. – Total Market Opportunity = ∑(Revenue* (% Revenue Spent on IT * % Allocation of IT Budget Towards DR/BC) = $248,000,880 • What is our expected take of this market? – Let’s use our current overall win rate of 25%. – So total market opportunity = (25% * $248,000,880) = $62,220,000 16
Census-Based Market Sizing Example • Question: What is market size for firm who sells to US-based architecture firms with greater than $2.5M in revenue and an ASP of $5,000 per year? • How many US-based architecture firms are there with greater than $2.5M in revenue? • Employee to Revenue Conversion: 20 employee minimum • Find NAICS Codes for target space: 54131 and 54132 • Finding right Census Dataset - focus on dataset that is most granular with firm size on low-end. • Note: Hierarchical data so components are only additive when have same number of NAICS digits. • Multiple relevant NAICs for a specific sector. Sometimes at different hierarchy in data. What is the overall market opportunity for this firm? – Target Market Opportunity = Number of Opportunities * ASP = (1857+365) * 5,000 = $11,110,000 17
LinkedIn-Based Market Sizing Example • Question: What is market size for firm who sells to US-based architecture firms with greater than $2.5M in revenue and an ASP of $5,000 per year? • How many US-based architecture firms are there with greater than $2.5M in revenue? • Employee to Revenue Conversion: 20 employee minimum • Identify parameters and determine if need to qualify by advanced keywords search. • Determine if opportunity at firm or location level. • Pull Counts by Company Size Ranges Search Term None None Architectural Services Architectural Services Architectural Design Architectural Design Architectural Landscape Architectural Landscape Category Architecture & Planning Architecture & Planning Architecture & Planning Architecture & Planning Architecture & Planning Architecture & Planning Architecture & Planning Architecture & Planning Type Location Count Company Count by Employee Size Any Not 51 to 201 to 501 to 1,001 to Size Specified 1 to 10 11 to 50 200 500 1,000 5,000 7,326 1,121 3,514 1,917 632 91 22 24 Headquarters Only 6,637 1,004 3,132 1,767 601 87 20 21 2 3 Location Count 1,239 158 588 375 97 15 1 5 0 0 Headquarters Only 1,098 135 510 338 95 15 1 4 0 0 Location Count 2,080 269 1,038 584 159 21 3 6 0 0 Headquarters Only 1,827 231 888 527 153 20 3 5 0 0 Location Count 141 19 69 32 18 1 0 2 0 0 Headquarters Only 125 17 61 27 18 1 0 1 0 0 5,001 to 10,000 2 10,000+ 3 18
LinkedIn-Based Market Sizing Example Continued • Estimate composition of company size range that overlaps cut-off point using alternative source like Census Data. • Quarantine any data that does not need to be included in transformation to minimize exposure to assumption. Segment Architecture Services • Number of Firms Total 23,581 Firm Population Ratio Number of 0-4 5-9 10-19 20-99 100-499 500+ Firms >10 <20 20-99 100+ 14,704 4,482 2,481 1,599 262 53 4,395 56.45% 36.38% 7.17% Apply conversion ratio to LinkedIn estimate and calculate number of opportunities: Approach LinkedIn Category: "Architecture & Planning" LinkedIn Search: "Architectural Landscape" LinkedIn Derived • Less Than 20 Employees 5,033 99 4,934 100 Employees 20 to 99 Employees or More 979 193 19 4 960 189 Total 6,205 122 6,083 What is the overall market opportunity for this firm? • Target Market Opportunity = Number of Opportunities * ASP = (960+189) * 5,000 = $5,745,000 19
Directory-Based Market Sizing Example • Question: What is market size for firm who sells to US firms in Financial Service industry with at least 1,000,000 customers and an ASP of $100,000? • What does this target market entail? • Can it be broken-down into sub-markets? • FDIC Insured versus Non-FDIC Insured • Type: Commercial Bank, Retail Bank, Asset Management Company, etc. • • What is definition of Opportunity? • Firm, location, division? How many US-based financial service firms are there with at least 1 million customers? • Identify Directories • Government Directories: Regulatory Agency and Regulation directories and databases • Private Directories: Top firm lists, Association membership lists, licensing organizations • Does any combination of directories allow for us to directly or indirectly estimate customers and cover the whole space we are interested in sizing? • FDIC Insured US Banks Database • Towers Watson 2012 Top 500 investment firms 20
Directory-Based Market Sizing Example Continued • Build list of companies by sub-market • Review data on companies to see what might be able to be used to estimate customers • Assets under management looks the best as it is available in both sources. • Convert Assets Under Management to Customers for list of companies. Customers Assets Average Assets Per Customer • • Wells Fargo 70,000,000 514,853,000,000 7,355 TD Bank Average 20,500,000 $98,613,149,000 4,810 6,083 Create combined list of firms with at least 1 million customer, dedup and count. We get 119. What is the overall market opportunity for this firm? • Target Market Opportunity = Number of Opportunities * ASP = (119) * 100,000 = $11,190,000 21
Power Curve Market Sizing Example • Question: What is market size for company that sells to accounting firms with $20 Million in revenue if their ASP was $100,000 per year? • How many accounting firm opportunities are there? • Prior Knowledge: This space is dominated by the Big 4 (Ernst Young, KPMG, Deloitte, PWC). • Hypothesis: May be extremely consolidated space, whereby we can use power curve to estimate. • Validate Hypothesis: Power curve hypothesis is validated by Chart of top 25 accounting firms by revenue and then top 100 firms by revenue to confirm theory. • Not strong enough to answer question outright if need an exact number. 22
Power Curve Market Sizing Example Continued • • Can we estimate employment composition for top 100 versus rest of market? • No public data on this. • • What is total revenue of accounting market? • The top 100 firms account for $49,468,330,000 and the total accounting market is $374,000,000,000. However, this seems to include lots of other spaces. Last resort, can graph revenues of top 100 and extrapolate out. • 108 firms in target What is overall market opportunity for firm? – Target Market Opportunity = Number of Opportunities * ASP = 108 * $100,000 = $10,800,000 23
Resource Constraint Angle on Sizing Example • Question: What is the market opportunity 1- year out for a firm selling marketing automation software to financial service firms with at least 50 million in revenue? • Resource Constraints: • Can bring on board 5 salespeople within budget this year • Each salesperson can make 10 phone calls a day that get through to a prospect • 3 weeks of vacation per employee • 25% of attempts will convert into opportunities • 20% of opportunities will convert into sales • 5% of the sales calls will convert within six months • ASP $240 revenue per year • Insight: Market size looks big enough to withstand well over a year of growth, so real constraint is company’s own resources. • What can we expect the sales to be after first year of operation? • 10 calls/day x ((365 days/year - 21 vacation days)*(5/7)) x 25% opportunity conversion rate * 20% sales conversion rate x $240/sale x 5 salespeople = $147,000 24
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