| In developing their business plans, companies of all | | | | The methodology required to size these new |
| sizes face the challenge of determining the size of | | | | markets requires two approaches. Each approach will |
| their markets. To begin, companies must present the | | | | yield a different approximation of the potential |
| size of their "relevant market" in their plans. The | | | | market size, and often the figures will work together |
| relevant market equals the company's sales if it were | | | | to provide a solid foundation for the market's |
| to capture 100% of its specific niche of the market. | | | | potential. I call this first approach "peeling back the |
| Conversely, stating that you were competing in the | | | | onion." In this approach, I start with the generic |
| $1 trillion U.S. healthcare market, for example, is a | | | | market (e.g., the coffee market) that that company |
| telltale sign of a poorly reasoned business plan, as | | | | is trying to penetrate, and remove pieces of that |
| there is no company that could reap $1 trillion in | | | | market that it will not target. |
| healthcare sales. Defining and communicating a | | | | For instance, if the company created an ultra |
| credible relevant market size is far more powerful | | | | high-speed coffee maker that retailed for $600, it |
| than presenting generic industry figures. | | | | would initially reduce the market size by factors such |
| The challenge that many firms face is their inability to | | | | as retail channels (e.g., mass marketers would not |
| size their relevant markets, particularly if they are | | | | carry the product), demographic factors (lower |
| competing in new or rapidly evolving markets. On one | | | | income customers would not purchase the product), |
| hand, the fact that the markets are new or evolving | | | | etc. By peeling back the generic market, you |
| is the reason why there may be a large opportunity | | | | eventually will be left with only the relevant portion |
| to establish them and become the market leader. | | | | of it. |
| Conversely, investors, shareholders and senior | | | | The second methodology requires assessing the |
| management are often skeptical to invest resources | | | | market from several angles to approximate the |
| because, since the markets do not yet exist, the | | | | potential market share, answering questions |
| markets may be too small, or not really exist at all. | | | | including:o Competitors: who is competing for the |
| In developing over 200 business plans for emerging | | | | customer that you will be serving; what is in their |
| ventures, venture capital firms, SMEs and Fortune | | | | product pipeline; once you release a product/service, |
| 500 spinouts, I have encountered the challenge of | | | | how long will it take them to enter the market, who |
| sizing emerging markets numerous times and has | | | | else may enter the market, etc.o Customers: what |
| developed a proprietary methodology to solve the | | | | are the demographics and psychographics of the |
| problem. | | | | customers you will be targeting; what products are |
| To begin, it is critical to understand why traditional | | | | they currently using to fulfill a similar need (substitute |
| market sizing methodologies are ill-equipped to size | | | | products); how are they currently purchasing these |
| emerging markets. To illustrate, if a research firm | | | | products; what is their degree of loyalty to current |
| were to use traditional methods to size a mature | | | | providers, etc.o Market factors: what other factors |
| market such as the coffee market in the United | | | | exist that will influence the market size - government |
| States, it would consider demographic trends (e.g., | | | | regulations; market consolidation in related markets, |
| aging baby boomers), psychographic trends (e.g., | | | | price changes for raw materials, etc.o Case Studies: |
| increased health consciousness), past sales trends | | | | what other markets have experience similar |
| and consumption rates, price movements, competitor | | | | transformations and what were the customer |
| brand shares and new product development, and | | | | adoption rates in those markets, etc. |
| channels/retailers among others. However, conducting | | | | While these methodologies are often more |
| such an analysis for emerging markets presents a | | | | painstaking than traditional market research |
| challenge as several of these factors (e.g., past sales, | | | | techniques, they can be the difference in determining |
| demographics of the customer when there are no | | | | whether your company has the next iPod or the |
| current customers) don't exist because the markets | | | | next Edsel. |
| are presently untapped. | | | | |