Discovering Opportunities for Business Growth Through Market Sizing

Published on 15 Jun, 2017

In the competitive and changing business environment today, it is difficult to sustain growth. Organizations across geographies are faced with the same fundamental question – how do we grow?

There are various ways to achieve growth. It could be by investing in newer products, entering a new segment, transitioning to a new end-use application, or expanding to newer geographies. To understand market opportunities correctly and estimate the business potential of any investment, it is critical to know the addressable market. Market sizing analysis helps in identifying this.

The analysis can be carried out through multiple ways, such as reviewing total sales revenue, potential customers or sales volume. There are also different methods for calculating market size – top-down, bottom-up, demand-side or supply-side analyses, etc. – but it is important to ensure that the results are reliable.

Market sizing exercise entails:

  • Defining the Market
    It is important to outline the scope of the market before approaching strategic business questions and determining the correct market sizing methodology. It is also imperative to get a thorough understanding of the product, narrow it to end application, and define the geography.

    Market size can be defined in terms of Total Available Market (TAM), Served Available Market (SAM), and Share of Market (SOM).

    TAM refers to the total revenue opportunity available for a product or service (in a defined market); SAM refers to the percentage or size of TAM in a firm's existing core competencies and/or past performance, while SOM refers to the proportion of SAM that one plans to serve.

  • Determining the Right Approach
    Primarily, there are two methodologies: top-down approach and bottom-up approach.
    • The top-down approach looks at the comprehensive market details with all its components. The broad market size figure is arrived at and the proportion that the target market represents is determined. For instance, if the size of the global cement packaging market is to be estimated, the global cement sales figure will be determined first and thereafter multiplied by the approximate packaging cost (for example, 5% of total cement sales value is packaging cost).
    • In bottom-up approach, the market size is built by totaling multiple variables of the target market. For example, while sizing the market for cleaning chemical dispensers used in commercial kitchens, the total number of commercial kitchens by segments will be arrived at (restaurants, hotels, hospitals, schools, etc.) first. Thereafter, the approximate number of cleaning dispensers installed per kitchen in each segment will be estimated; after that, the price per unit and lifespan of dispensers is determined.
  • Data Validation/Triangulation
    In an ideal situation, it is always advisable for any market sizing exercise to make use of both methodologies. There are other methods to validate market size as well, such as estimating through product complements, conducting a regression analysis, and looking at both demand side and supply side market sizing approaches.

By pursuing a structured market sizing approach and following best practices to collect right and accurate market information from desk and primary research, a comprehensive understanding of any product or service can be built; accordingly, informed business decisions can be taken which will prove to be profitable.