The Secrets of Market Sizing

Market sizing is a staple of consulting engagements, strategy development, investor pitches, and case interviews (e.g., classics like “how big is the market for golf balls in Japan?”).  Oddly enough, there’s very little publicly-available information on how to go about it.  Maybe that’s how consultants maintain demand for their services, or maybe it’s because no one wants you to know how shaky even the most frequently cited market size estimates can be.

Like forecasts, market size estimates should most often be considered directional (consulting speak for “in the right ballpark”).  You should also keep this point in mind when consuming market size information – the market size numbers you read in the news or market research reports are probably only accurate within 10-20% in many cases.  One of the best ways to ensure that you get at least a sensible result is to triangulate between different approaches: top-down and bottom-up estimates.

Top-down sizing

As the name suggests, you start from the top here: high-level numbers like the US population (about 305 million currently), the number of businesses in the country (about 6 million),  healthcare spending (perhaps $2.5 trillion for 2009), or the number of management consultants in the US (estimates vary, but 500,000 is a reasonable number).

Then you work down from that overall number to figure out what’s relevant to your company.  Let’s say you want to launch a premium online job board like TheLadders.com, where job seekers pay a $50 membership fee to post their resume and search for openings.  Starting with the total population, the table below shows how you might drill down to an actual market size in terms of revenue.  Note that I just used assumptions for most of these numbers.

Sample Top-Down Market Sizing

Value Source
Population 305 million US Census
Working Population X 50.5% Dept. of Labor
Changing Jobs Annually X 15% Assumed
Using Online Job Postings X 50% Assumed
Willing to Pay $50 for Posting X 20% Assumed
Market Size in Revenue = $115.5 million

The hardest part is usually finding the data to populate calculations like these.  How do you figure out what percentage of the job seeker market is willing to pay for a subscription site?  Well, the ideal approach would be a big consumer phone survey, but that type of research is expensive enough that it’s typically restricted to Fortune 500 budgets.  If you’re not in that league, you could do some secondary research on companies like TheLadders.com and see if any of it mentions those types of statistics.  Firms tend to keep those close to the vest, so you’re unlikely to find anything, especially if they’re smaller companies and/or privately owned.  You might have slightly better luck with sources on publicly traded companies, like say Monster.com’s investor conference calls.  You would probably have more success calling people in the online jobs industry and asking them – primary research (called primary because you’re going straight to the source of the information, not to a document that someone else prepared like a market research report). I’ll go into primary research in more detail in later posts.  If that’s not up your alley, the last resort is to “estimate,” or guess.  Most consulting firms go the primary research route (or create some kind of crazy Excel model that bakes in all sorts of assumptions and then gets footnoted as “ConsultingCo analysis”), while many startups use estimates and then try to validate those in the market once they launch.  If you use customer development, that’s a form of primary research.

There are also lots of packaged market research reports out there from various sources.  Be cautious both in purchasing and in using these reports.  They’re often quite expensive, their estimates aren’t necessarily reliable, and it’s amazing how often the  report that looks perfect for you turns out to define the market slightly differently than you do, often making it useless.  I’ve seen clients buy $4,000 reports and get absolutely no value out of them more than a few times.  These same caveats go for the various IT research firms like Gartner, IDC, and so on.  Now that I’ve warned you to take all of these reports with a big grain of salt, I should mention that FirstResearch.com has some more moderately priced reports.  Even better, the free previews show you a bit of their market size results.  I can’t vouch for accuracy, of course.  MarketResearch.com also aggregates a broad range of reports in one place, but these tend to be more expensive.

Bottom-up sizing

This approach works by looking at individual customers or competitors and rolling them up to get the overall size of the market.

For a great example of building up an estimate from individual customers, check out this presentation by Aaron Patzer from Mint starting at about the 12 minute mark.  It’s based on a lead generation model (where financial companies like credit card providers pay per customer that Mint sends them), so it’s slightly more complex than a straightforward consumer or B2B market.  Watch it twice!

Rolling up the revenue from individual companies to look at the overall market can be a great approach when there is a relatively small number of public companies in the market.  For the US car market, you could pretty easily look up US revenue in the filings of GM, Ford, Toyota, and a handful of others.  Add those up, round up by a few percent for smaller companies you didn’t look at directly (Tesla, Lamborghini, etc.), and you have a rough market size.

In smaller and more fragmented markets, adding up individual competitors quickly becomes painful, but it can still be your best option.  I once sized an obscure category of diagnostic supplies by individually estimating revenue for over 50 companies and then totaling them up for the overall market.  I’m sure the resulting number was not accurate to within a million dollars, but it was good enough for our purposes.  The added benefit is that this type of estimate can be easier to defend to clients or investors because it relies on a broader, more easily confirmed set of data points.  Bottom-up estimates can still be gamed by fiddling with the individual components, however.

The addressable market

Even when doing a bottom-up analysis, you have to be careful not to overstate the boundaries of the relevant market.  Usually, you won’t be looking at the overall car market or anything else that monolithic because no product competes across an entire industry.  For instance, you might be launching a new sub-compact.  Then you’ll need to cut down your market size based on the percentage of sales that are sub-compacts.  Or you might be opening one new dealership, meaning that you have to take into account the geographic radius from which you’ll get customers.  The same geographic cut would apply to any retail business.  Even for some business to business examples, your product will become less competitive past a certain distance because of shipping costs.  For heavy, low-value products like paper or cement, your addressable market may only be within a couple of hundred miles of your plant.  For products like pharmaceuticals or software, those considerations don’t come into play.  More generally, there are a variety of other factors to take into account in defining your addressable market, from regulatory restrictions to distribution channels and customer segments.

The bottom line here is that you need to be a little critical of your own estimate and make sure that you’re sizing the market that you or your client can actually address, not a general market that looks impressive but isn’t really relevant.  Don’t be like all those dot-com entrepreneurs who said, “The XYZ market is $100 billion globally, and even if we only get 1% market share…”

Triangulating

As you can tell by now, both top-down and bottom-up approaches involve a good bit of uncertainty.  Time and data permitting, you should triangulate among a top-down analysis, a roll-up of individual customer spending, and a roll-up of competitor revenue.  In an ideal world, these numbers should all be in the same ballpark, but if there is a discrepancy, you can troubleshoot your analysis or do a weighted average of the estimates based on your most reliable information.

The resulting number won’t be perfect, but you’ll have a good analysis to walk clients or investors through to get their buy-in.

Market trends and growth rates

For many mature industries, markets are growing at around the same rate as the overall economy, so thinking about market growth rates may not be particularly important.  Industries in growth or decline stages are very different.  Growing markets are much more attractive, size being equal, because brand new customers are entering the market.  It’s much easier to acquire a customer who’s not already buying from your competitor.

The extreme case here is new markets that don’t currently exist – obviously difficult to size.  In these markets, just try to make good assumptions, consider various scenarios for your key assumptions, and put a plan in place to test those assumptions as soon as possible.

Also consider whether your company will be generating revenue differently than current industry incumbents.  For example, the office applications market dominated by Microsoft Office might be a $10 billion market, but if you’re coming in at 1/10 the price of Office, you should really consider it a $1 billion market when developing your growth plans.  Disrupting an existing market is a great competitive advantage, but it also shrinks the available pie.  Another great example is Craigslist, which is turning the formerly $30 billion classified advertising market into a $100 million market.

Projecting market growth is another quixotic exercise that I’ll cover in another post.

Related posts

I’ll be working on a series on market sizing.  Here are a few of the other posts you might want to check out.

Other resources

Finally, here are a couple of other good reads on market sizing.  Let me know if you have others to recommend.

This post has turned out to be rather long, but I hope you find it helpful.  I would be very interested to hear what aspects you would like more information on, or what you do differently.


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  • Chris KEler

    Nice post Greg. Very helpful

  • http://twitter.com/rdauster Rodrigo Dauster

    Don’t forget, there is a number less than 1%

    From Hugh MacLeod post:
    “…a musician who bought a quarter-page ad in a big magazine. The
    magazine had a circulation of a million readers:
    The musician had pressed up 10,000 copies of his CD in anticipation of
    10,000 orders that were sure to come through that week.
    He kept saying, “If only one percent of the people reading this
    magazine buy my CD… that’ll be 10,000 copies! And that’s only one
    percent!”

    He bought 10,000 padded mailers and mailing labels. He converted his
    garage into a big mailing center.
    He kept saying, “Maybe we can get like 10 percent! That’s 100,000! But
    worst case scenario, if only 1 percent… that’s still awesome!”

    The magazine issue came out, and… Nothing. He bought an issue. There
    was his ad. But the orders were not coming in! Was something wrong?
    No. He tested it. Everything was working.

    Over the next few weeks he received four orders. Total CDs sold: FOUR.
    My friend telling the story ends it with the best line: “He forgot
    there was a number lower than one percent.”
    http://bit.ly/dTJidu

  • http://www.brekiri.com/ Greg4

    Great link! I love that post.

  • Denny Afstand

    All these data can be obtained from the consulting industry analysis, I used this data for your market research on the structure of the buyer-market.

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