Market sizing is the structured business process of estimating the size of a particular market segment within the economy. The size of the market is typically determined in value (monetary) or quantity (e.g. unit weight, volume, count, etc.) terms, depending on the objective of the market sizing research. In terms of which market segments are feasible for market sizing, there is theoretically no limitation to this as market sizing research can be carried out on any product, user group, and across any industry; however, the feasibility of the research can certainly be limited by the scarcity of information, cost-benefit tradeoff of obtaining the information, and the granularity of desired estimations.
There are three key dimensions that form the basis of every market sizing research:
- Total addressable market: The total addressable market (or total available market) is the total market size representing the entire potential demand for a product or service. From a company’s perspective, this represents the company’s own share of the market plus the remainder of the market that is not captured by the company.
- Serviceable available market: The serviceable (or served) available market is the portion of the total addressable market that can be realistically targeted by the company, given the company’s existing resource or geographical constraints.
- Market share: The market share is the portion of the serviceable available market captured by the company. Although it is theoretically possible for the company’s market share to be the entire serviceable available market (as in monopolistic markets), this is unlikely due to market competition from competitors.
It is important to understand the subtle distinctions between the dimensions of market sizing. The total addressable market does not equal the sum of all market shares captured by direct competitors; market shares of indirect competitors, such as in the form of competition from close product or service substitutes, represent potential demand, thus factor into the total addressable market as well. In the case of saturated markets, identifying the total addressable market can be critical to discover opportunities for new growth.
Market Sizing as a Component to Strategy
Market sizing is important for businesses to identify opportunities for new growth. From a numerical standpoint, market sizing enables businesses to quantify the value or worth of a particular new market, of which management can then justifiably decide whether the return from the new market is worth investing in.
From a research standpoint, market sizing necessitates a clear understanding of target groups and their relative sizes. Target groups may consist of existing users, consumers, or customers as well as potential users, consumers, or customers. Estimation of their relative sizes is essential for marketing functions to prioritize marketing resources, optimize marketing content, and establish target markets for the company’s products and services.
A clear understanding of the company’s serviceable available market and market share reveals critical information about the company’s actual performance in the market, as opposed to the company’s historical performance. This enables businesses to evaluate the performance of their businesses more conclusively, anchored in the real market context. From there, management may embark on strategic goal-setting that is market driven and unbiased to their internal sales and marketing functions.
As observed above, market sizing serves as a component to strategy and supports the decision making process through evidence-based market intelligence. As such, market sizing research should ideally be conducted prior to any critical business decisions to be made, particularly where the risk-return is higher than average. There are several methods that companies may utilize to conduct their market sizing research, depending on the size and nature of their businesses, of which the easiest is to purchase syndicated (or in-house published) market research reports. However, in the event that these syndicated market research reports do not provide the desired granularity of information, a custom market sizing research can be undertaken within the company or outsourced to third-party specialist firms.
Market Sizing Research Approaches
Market sizing researches are typically undertaken by multinational companies and large companies in Malaysia, although smaller companies such as SMEs can benefit from market sizing research as well. The difference in uptake is typically attributed to resource limitations as well as the individual company’s management and decision making style. Resource limitation may force smaller companies to conduct market sizing researches in-house using ad-hoc procedures and whatever resources that are available to them, which typically results in poorer estimations. However, there are innovative solutions today that can better meet the research requirements of smaller companies if they desire to engage with third-party professionals.
Regardless of the decision to undertake market sizing research in-house or outsource it to a third-party professional, there are a few key factors that research managers need to take into careful consideration when approaching market sizing research, in order to ensure the reliability of the market sizing results.
- The market sizing model: The market sizing model are constructed from a set of axioms, from which the output of the market sizing model (i.e. the final value or quantity term) is determined. The axioms need to be established before the market sizing research can take place, as they determine what data needs to be obtained to build the model as well as set the direction for how the data will be obtained. The reliability of the market sizing model is heavily dependent on the axioms as well; a broadly defined axiom set may result in an output that grossly overestimates the market size, whereas a narrowly defined axiom set may result in over-definition to the extent that the research becomes impractical to be carried out.
- Secondary information sources: The reliability and credibility of secondary information sources needs to be ascertained before being factored into the market sizing model. One key consideration is the location of the data source. The further away the data source is from the market in question, the more likely the data was derived from mathematical modelling, with lesser degrees of cross-verification from the actual market. In any case, particular attention will need to be paid as to how the data was collected and tabulated.
- Primary information methodologies: As is usually the case, the required granularity of the market sizing research is much higher than what is being covered by syndicated market research reports. In such instances, primary information needs to be obtained, thereby necessitating the proper design of primary research methodologies. In particular, attention needs to be paid to ensure that the methodology is effective in collecting the type of data that is required.
- Historical performance: Historical performance data is the first information component that flows into the market sizing model. Historical performance data may include macro and meso economic data, as well as firm-level data.
- Present landscape: Present landscape data is the second information component that flows into the market sizing model, and are similar to historical performance data. However, these data are generally not available in published form due to their relative recency, hence are typically obtained through primary research methods.
- Triangulation: Certain data and information may be difficult or impossible to obtain, due to research barriers such as information restriction or information scarcity. In these situations, triangulation models are employed to estimate or derive the information needed, such as through proxy indicators or expert inputs. The axioms used in establishing triangulation models require equal care as to market sizing models in order to ensure reliability.
- Future outlook: A reliable market sizing model accounts for market drivers and barriers in addition to quantitative data. Market drivers and barriers, which are obtained through a qualitative approach, provide the building blocks on which future growth potential scenarios can be constructed upon.
- Growth potential: The future growth potential is determined from a set of scenarios that is supported by a market drivers and barriers analysis. Based on the scenarios, mathematical forecasting models can be employed to numerically quantify the impact of the scenarios. Benchmarking can be used to ensure that the forecasted numbers are reasonable.
- Cross-verification: Last but not least, the final outputs of the market sizing model are taken back to the market and undergo a second round of research for the purpose of cross-verifying and logic-checking the outputs. This last step helps the model approximate the real market as closely as possible. Consistent cross-verification of the model will signal whether the axioms of the model have changed and require updates to the market sizing model.