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How to Size a Market Opportunity — Fast

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Reliable market sizing doesn't have to be as complicated or painstakingly slow as you think. This presentation offers a quick overview of the art and science of market sizing, and offers a step-by-step guide on how to conduct seven fast market sizing approaches.

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How to Size a Market Opportunity — Fast

  1. 1. Ins and Outs of Sizing a Market in No Time Last Updated on: July 10, 2015 Created By: Brandon Hickie
  2. 2. 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 • 8 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 • Bureau of Labor Statistics Market Sizing
  3. 3. Overview on Science of Market Sizing 3
  4. 4. Understanding How to Think About a Market Opportunity 4 • 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.
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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: 9 Market Definition Relevant Good/ Service Minimum Viable Opportunity Resources Timeframe Costs Opportunity Limitations Legend Business Factor Outside Factor
  10. 10. Opportunity Size Triangulation – 3 Ways to View an Opportunity 10 Opportunity Size Top-Down: Percentage of total revenue in current market Bottoms-Up: Customer or competitor customer spend on this category Resource Constraint Sizing: Ability and cost to serve market within time and resource constraints.
  11. 11. 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
  12. 12. 8 Quick Market Sizing Approaches 12
  13. 13. Quick Top-Down Example 13 • 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.
  14. 14. Quick Top-Down Example Continued 14 • 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:
  15. 15. Analyst Spend Statistic Market Size Example 15 • 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 Company Annual Revenue Employee Count Allocation of revenue to IT budget (Utilities) Allocatio n of IT budget towards Target "take" % Monthly Service Price Can Afford Inputs 0.9 6.2% 1.30% 100% 12 $5,000,000 6 $310,000 $4,030 $4,030 $336 $10,000,000 11 $620,000 $8,060 $8,060 $672 Basement $15,000,000 17 $930,000 $12,090 $12,090 $1,008 $20,000,000 22 $1,240,000 $16,120 $16,120 $1,343 $30,000,000 33 $1,860,000 $24,180 $24,180 $2,015 $40,000,000 44 $2,480,000 $32,240 $32,240 $2,687 $50,000,000 56 $3,100,000 $40,300 $40,300 $3,358 $75,000,000 83 $4,650,000 $60,450 $60,450 $5,038 $100,000,000 111 $6,200,000 $80,600 $80,600 $6,717
  16. 16. Analyst Spend Statistic Market Size Example Continued 16 • 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. • 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 Source Number of Utilities Confidence LinkedIn 1309 Medium US Energy Information Administration 1,225 High Best Estimate 1,225 High
  17. 17. 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. • What is the overall market opportunity for this firm? – Target Market Opportunity = Number of Opportunities * ASP = (1857+365) * 5,000 = $11,110,000 17 Multiple relevant NAICs for a specific sector. Sometimes at different hierarchy in data.
  18. 18. 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 18 Any Size Not Specified 1 to 10 11 to 50 51 to 200 201 to 500 501 to 1,000 1,001 to 5,000 5,001 to 10,000 10,000+ None Architecture & Planning Location Count 7,326 1,121 3,514 1,917 632 91 22 24 2 3 None Architecture & Planning Headquarters Only 6,637 1,004 3,132 1,767 601 87 20 21 2 3 Architectural Services Architecture & Planning Location Count 1,239 158 588 375 97 15 1 5 0 0 Architectural Services Architecture & Planning Headquarters Only 1,098 135 510 338 95 15 1 4 0 0 Architectural Design Architecture & Planning Location Count 2,080 269 1,038 584 159 21 3 6 0 0 Architectural Design Architecture & Planning Headquarters Only 1,827 231 888 527 153 20 3 5 0 0 Architectural Landscape Architecture & Planning Location Count 141 19 69 32 18 1 0 2 0 0 Architectural Landscape Architecture & Planning Headquarters Only 125 17 61 27 18 1 0 1 0 0 Search Term Category Type Company Count by Employee Size
  19. 19. 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. • Apply conversion ratio to LinkedIn estimate and calculate number of opportunities: • What is the overall market opportunity for this firm? • Target Market Opportunity = Number of Opportunities * ASP = (960+189) * 5,000 = $5,745,000 19 Segment Number of Firms Total 0-4 5-9 10-19 20-99 100-499 500+ Number of Firms >10 <20 20-99 100+ Architecture Services 23,581 14,704 4,482 2,481 1,599 262 53 4,395 56.45% 36.38% 7.17% Firm Population Ratio Approach Less Than 20 Employees 100 Employees or More Total LinkedIn Category: "Architecture & Planning" 5,033 193 6,205 LinkedIn Search: "Architectural Landscape" 99 4 122 LinkedIn Derived 4,934 189 6,083 19 979 20 to 99 Employees 960
  20. 20. 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
  21. 21. • 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. • 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 Directory-Based Market Sizing Example Continued 21 Wells Fargo TD Bank Average Customers 70,000,000 20,500,000 Assets 514,853,000,000 $98,613,149,000 Average Assets Per Customer 7,355 4,810 6,083
  22. 22. 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
  23. 23. Power Curve Market Sizing Example Continued 23 • 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. • Can we estimate employment composition for top 100 versus rest of market? • No public data on this. • 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
  24. 24. 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
  25. 25. Bureau of Labor Statistics Market Sizing Example • Question: What is the U.S. market size for a real estate sales associate enablement tool that costs $3 per user per month? And how will this market change by 2022? • Who are your target users? • Real Estate Sales Associates (Non-Brokers) • Can use BLS employment tables to find specific occupation code: 41-9022 • Is this a horizontal solution or is focused on a subset of industries? • No, it is a vertical product focused on residential real estate. This is identified as code: 531000 in the BLS data • How many retail sales associates are there in the U.S.? 139,000 • So the market size today is: 139,100 * 12 months = $1,669,200 • What do we project the market size will be in 2022? 1,669,200 * (1 + 12% Forecasted Percentage Change) = $1,869,504
  26. 26. Need a Quick Market Size Estimate? Get a trustworthy answer in 3 Minutes or Less!

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