Although market sizing might not sound particularly radical, it is the key to understanding how to take a company forward, and also to understand any threats from competitors and changes in market conditions. In larger companies, there is often a strategy department that will undertake much of this work, but in any case, the finance team will need to understand these dynamics to have a credible forecast or plan.
A good way to start thinking about market sizing is to use the Ansoff Matrix, as shown below in Figure 1. This considers the options for growth in both new and existing products and markets, with the risk of each strategy running diagonally from low to high across the grid.
Figure 1: The Ansoff matrix
In any company there is a finite amount of management time and resource; therefore it is important to carry out the analysis to identify which of these strategies will optimise the company’s potential for success.
Four Areas to Consider when Reviewing Market Size
The first step is identifying the addressable market. Who is your company selling products to? The factors that you would evaluate will depend on your market. For example, if you are selling household products, it might be the number of households in your market(s) that could potentially use the products; if you’re selling to individuals, it might be those with a certain amount of income or another demographic that would make your product relevant to this specific group. You could also look at the number of customers using your product already, or who are using a similar/adjacent product.
To get a good sense of the opportunity, it is worth collecting a few years of historic data, and then using forecasts to project out for a number of future years. Depending on your industry, this could be a three-to-five-year projection, in capital intensive industries it could be ten years plus. We are interested in trends in this data over time.
The next step is to consider the competition – how many competitors are in the market, how big they are, who is growing/declining over time, their pricing strategy/product offering, and so on. Where possible, try to get hold of their externally reported financial information, as well as any announcements of strategic intent/merger and acquisition (M&A) activity.
Thirdly, look at the regulatory and technical dynamics of the market, as these can create barriers to entry and can influence growth and market size. Should you work in a regulated industry there may be changes in regulatory requirements, which can make it difficult to grow a business. Similarly, there may be one player who has a technological advantage, such as faster or cheaper technology, better social media or loyalty data or digital distribution channels. This will also influence their share of the market. Should your competitor’s technology be superior to your own, ask yourself whether you would want to replicate it and whether doing so would represent a long and/or expensive process.
Finally, it is important to consider the economics of operating in both existing and new markets. You will have a profit and loss (P&L) for your existing operation, but you will have to flex this for future growth plans or for new markets entries. For the latter, it is important to adjust your model to take into account differences by market – for example, prices and labour costs. There will also be start-up costs to consider, as well as the cost of scaling up the operation – it is important to establish the minimum and optimal economic operating size.
To perform this analysis the treasury department will have to collect a considerable amount of data, if it hasn’t got it already. The good news is that much of this data is readily available on the web, through sites such as Google, Wikipedia, the CIA World Fact Book (yes, the Central Intelligence Agency publishes a great database for free), the World Bank Data Indicators, the International Monetary Fund (IMF) World Economic Outlook database, and the United States Census Bureau. There are also agencies that collect data, such as Euromonitor and Datamonitor – some of their data is available in public libraries, but rather more is available on a subscription basis.
Compare and Contrast
When researching competitors, go to their own company websites – particularly the investor relations pages if they have those. For firms based or listed in the UK, go to the Company Check website to get their financials. Similar websites also exist for other countries. Should this task extend to researching a large number of companies in numerous countries, then the Bureau van Dijk (BvD) Orbis database is very good, although there are some countries where it is difficult to obtain any data on the companies listed there.
When considering a number of countries, it helps to bring together the data in a summary table such as that in Figure 2 below.
Figure 2: Example of Summary Table
This would be just a summary table though – it would still need to be backed up with more detailed analysis by country. Should the company be entering a new market, follow up the initial market sizing with in-country visits and further analysis – the market sizing desktop analysis is just the first stage.
Hopefully this article has provided an overview of how to assess your company’s position in its markets, its aspirations and its opportunity. This is an area that is often overlooked by the financial planning and analysis (FP&A) community, but if done properly, it can add massive value to a company as well as a competitive edge.
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