Market size

How big is the market your firm addresses?

If your business is called Tesco, you will subscribe to a market research organisation. You will feed it data at the end of each appropriate period and receive results promptly on the overall size of the UK grocery market, its growth since the previous period and whether your market share has gone up or down from around 27%.

And so it is with most large companies.

Yet, many medium-sized companies enjoy a similar relationship with a niche market research house or industry association. I have worked in some obscure niches over the years and it never ceases to amaze me how companies with a turnover of just a few million pounds, dollars or euros still receive good, regular, informative market data from some enterprising independent research house serving that company and most of its competitors.

But, for small companies, this data may be punitively expensive to acquire, may not be directly relevant or may not exist.

Tough. Your backer needs an estimate of market size.

They want to know whether you are a big fish in a small pond, or vice versa. Suppose you are a mega fish in a tiny pond, but one that can be protected from other waters. Your backer would love to hear that.

You’ll have to have a go, and make an estimate of market size yourself.

It is not that difficult. Many years ago, I developed a bottom-up process for market sizing, which I termed marketcrafting, and have used it frequently with entrepreneurs or managers of smaller businesses over the years. Used with care, it works.

Marketcrafting is a doubly useful process. Not only does it give you the base data needed for market demand sizing and growth (Chapter 3 of your business plan) but for industry supply too (Chapter 4).

It is, however, terribly approximate. Appreciate that, live with it and do it ­anyway – and you’ll find that your backer will appreciate your diligence.

There are seven main steps in marketcrafting:

1. 1Select your main competitors – those you pitch against regularly, those you exhibit alongside at trade shows – and don’t forget the foreign competitors, especially those from lower cost countries.
2. 2Starting with competitor A, ask a series of questions: Do you think they are selling more or less than you into this market? If less, by how much less, very roughly? Are they selling half as much as you? Three-quarters? If they sell more than you, by how much more, roughly? 10% more? One-third more? Is there any publicly available information that can guide your assessment? (A’s sales to this market are unlikely to be available if it is a private company, but employment data can be indicative.) What do customers tell you? And suppliers? They may well know, for example, that A buys more raw material from them and other suppliers than you do, maybe 50% more.
3. 3Taking your current sales level as an index number of 100, assign the appropriate index number to competitor A. If you think they sell less than you in this market, but not that much less (say, 10% less), give them an index number of 90; if you think they sell a lot more than you, perhaps an extra half as much again, give them 150.
4. 4Repeat steps 2 and 3 for each of the competitors named in step 1.
5. 5Make an allowance for any other competitors you have not named; for example, those who are small or only appear now and again. This should also be an index number. If you think all these other competitors together sell about half what you sell to the market, give this ‘Others’ category an index number of 50.
6. 6Add up all the index numbers (including your own 100), divide the total by 100 and multiply by your level of sales; that is your preliminary estimate of market size.
7. 7Ask your sales director to complete the same exercise. Get them to talk to the guy on the sales team who used to work at competitor A and the person in R&D whose former partner now works at competitor B. Get their inputs. Then get inputs from your operations director and head of R&D. Wherever their views differ from yours, discuss and refine the numbers. You have now built a reasoned estimate of market size.

Marketcrafting is hardly an accurate process, nor can it be guaranteed that the final number will not be some way off. But it is better than nothing, much better, because you can use the results to get indicative values of four parameters key to business strategy and planning:

• ■Market size (as above, though admittedly highly approximate).
• ■Market share. Once you ‘know’ market size, you also know your market share (i.e., your sales level divided by estimated market size); you also have an estimate of the market share of each of your competitors.
• ■Market growth. Repeat the seven-step marketcrafting approach above to estimate your market size of three years ago. For example, did competitor A sell more or less than you to this market three years ago, before, for example, their new depot came into operation, and by how much? You now have two data points – market size of today and that of three years ago. Punch that data into your calculator and out will pop an average compound growth rate over the three years, which serves as a crude estimate of recent market growth.
• ■Market share change. Best of all, since you now know your market share three years ago and today, you also have an estimate of your market share gain (or loss), as well as the gain/loss for each of your competitors. These estimates will be most useful in assessing both the competitive intensity of your market (next chapter) and the competitive position of your firm (Chapter 5).

All these estimates are crude, perhaps in the extreme, but, believe me, they are better than nothing. Your backer will be impressed that you have tried to create some data out of nothing. And it gives them some sort of basis upon which to work, to challenge you on your assumptions, to do some checking on the Web and over the phone.

Above all, it gives them the groundwork to come up with their own range of estimates, should they choose to do so.

One caveat. Make sure you identify the relevant market size. It has to be that of the particular segment you are addressing. If you run a deli grocery in an off-high street location in Bristol, putting down the size of the UK grocery market as your addressable market will not be helpful. It’s fine for Tesco, not for you.

Finally, here’s a simple example of the findings that can be deduced from the marketcrafting process, adapted from an engineering company I worked with a few years ago (see Table 3.1).

The company’s turnover in this segment was about £30 million, so the market size could be estimated at 585/100 × 30, or around £175 million. The company’s market share emerged at 17% (100/585), rather lower than the 25% that management had quoted before the marketcrafting exercise. Likewise, the market share of its Far Eastern competitors (Group C), though significant and concerning at 21%, did not seem to be as high as the one-third quoted rather sensationally in the trade press.

When we repeated the exercise to estimate market size of three years earlier, we found that the market had contracted heavily during the post-credit crunch recession, falling by one-third, or roughly 10% per year. Meanwhile, the share of Far Eastern competitors had grown greatly from 9% to 21%, with corresponding share losses by the domestic players, including that of the company, from 20% to 17%.

These were important findings. The trends were, of course, known beforehand, but their quantification through the marketcrafting process, though very rough, put some of the wilder assertions into perspective and helped focus attention on the strategic challenge ahead.

One final word on marketcrafting: it can be used not just by small companies serving markets that are too small for market research companies to investigate. It can also be used by much larger companies when analysing the market for certain of their product/market segment niches. While the company as a whole may address a broad market, which will be well covered by market research companies, some of their niche segments may well not be – and here marketcrafting can be used to gauge estimates of market size.