Use this framework to assess potential opportunities
No one can claim to be the originator of market sizing. However, in the Post-War period, marketing became structured and market size data was required for marketing plans. In 1968 Aubrey Wilson wrote a book entitled The Assessment Of Industrial Markets in which he described the processes for calculating market size.
The term market size is used loosely. It can refer to the wider potential market available to a product (or service) or more often to the “Served Available Market” (SAM) in which the product plays. To better understand these concepts, think of the market for coffee. The “served market” for coffee is that defined exclusively as coffee sales to coffee drinkers. This in turn could be broken down into a number of product segments such as the market for instant coffee, the market for fresh coffee, the market for coffee capsules etc.
Beyond the served market is the “Total Available Market” (TAM). In the coffee example this could include the market size for other drinks such as tea, hot chocolate, milk drinks and the like. Of course, it may not be possible to easily convert some of the alternative drinks to coffee but they are nevertheless within the radar.
We should be careful of the concept of TAM. It is easy to arrive at a fast, furious and totally unrealistic figure of opportunity. There are over 5 billion people online in the world but how many of these can be judged as potential X users (Twitter users). There are a massive number of Twitter users but it is still, at 248 million daily users, only a small fraction of the TAM. There is a risk that entrepreneurs seeking to pump up the attractiveness of their offer will quote these stratospheric global TAM figures which have no reality in the short or longer term. The market size assessments that are more relevant to us are the served addressable markets (SAM) and these can be assessed in the following ways:
Assessing market size from the bottom up (demand-side)
This assessment uses the total number of people within a population and multiplies by the average consumption of the product. So, in the example of coffee we would take the total number of coffee drinkers within a geographical region, estimate the amount of coffee they consume in (say) a year, multiply the two figures and arrive at an assessment of market size for coffee consumption. This method of assessment is useful in that it helps us understand what is driving the market size. However, any slight misjudgement as to the average consumption of coffee or the number of coffee drinkers would mean a significant error in market size as the two figures are multiplied.
Assessing market size from the top down (supply-side)
Top-down assessments of market size use published statistics. These come from a wide variety of sources. Governments and trade associations publish statistics on the sales and output of products. Market research reports are published by specialist market research firms and they may make their overall findings available in articles and press releases. The shares and sales of major players in the market may also be published in a variety of sources and these can be aggregated to arrive at an overall market size.
Assessments of the market from the supply side are useful in helping understand the nature of the competition. Again, caution is needed as government statistics aren’t always accurate and published company revenues may be out of date or be too general to be useful.
Understanding the market size for a product is fundamental to all marketing plans. It is worth assessing the market in different ways in order to get a good fix on the market size. Any major differences in the calculations could lead to a deeper dive into the figures which may uncover insights and a better comprehension of the market.
Some things to think about:
How good is your company at assessing the size of the markets it serves? When did it last make an assessment? How accurate is that assessment?
Who is responsible in your company for the assessment of markets? Who checks on their assessment?
Do you have a breakdown of the market size in terms of the segments that you serve and that show your market share within each segment?
To what extent are the plans in your company driven by your assessment of the market opportunities?