What to Watch Out for When Sizing a Market
There are many ways a company can drive growth – below are just a few growth strategy examples:
- Market Development: Enter a new market or channel with existing product
- Market Penetration: Expand consumer reach with existing products
- Product Development: Launch a new product in existing market
- Diversification: Launch new products in new markets
- Inorganic Growth: Mergers and acquisitions or strategic alliances
Before deciding which strategic growth areas to prioritize and align resources to, many companies first look to understand the market potential in terms of revenue and consumer reach. Determining what is the total addressable market (TAM) can help leaders determine if the opportunity is sizable enough and moves the company in the desired strategic direction.
However, market sizing is not always straightforward, especially if there is a lack of reliable sales and consumer tracking data sources. In these situations, conducting a quantitative study in addition to secondary research can be extremely beneficial.
Below are two examples of how market sizing was used to help inform growth strategy and investment decisions
Outdoor Apparel Market Penetration Growth Strategy Example
Recently, Insight to Action conducted a quantitative study to size the total addressable market (TAM) for a direct-to-consumer outdoor apparel company. The client wanted to understand not only the revenue potential of its core consumer base but also expansion targets, including occasional active users.
To support this effort, Insight to Action took a two -step approach:
- Conducted a 10-minute online quantitative study to understand brand awareness and purchase, population incidence among target audience, and relative annual spend
- Combined survey findings with secondary research and publicly available data to build a TAM estimate
The end result was a clear understanding of the current penetration and revenue potential of different consumer segments as illustrated below:
The information was presented to C-suite executives and used to guide investment/resource allocation decisions.
In the growth strategy example above, market sizing was one of the most critical inputs to help inform the company’s overall growth strategy and investment decisions. As a result, taking the appropriate care and rigor is important. Below are a couple of watch-outs to be aware of when using a survey/secondary research approach for market sizing:
- Claimed spend and usage behavior is often overstated in survey data, so results should be calibrated to account for this
- It’s important to vet secondary sources to make sure they are reliable and can confidently be used to back your market estimates (e.g., Census Bureau data for population estimates)
- Lastly, TAM estimates consider the entire market potential. It’s rare for one business to realize the full opportunity. In order to estimate what is actually attainable by any one business, market share assumptions need to be further layered in
Snacking New Product Development Growth Strategy Example
In the past, I have also helped clients use market sizing to help prioritize expansion categories. For food and beverage, there is a reliable database of sales and consumer data, therefore a custom quantitative study was not required. Instead, we used the sales data available to rank snacking categories based on overall revenue and growth. Detailed serviceable obtainable market (SOM) assumptions were then made to size the market opportunity for specific new product ideas already in flight and close-in expansion categories.
While we didn’t do a custom quantitative study in this approach, it was important to fully understand the constraints of the database we were using for market sizing, including what was the overall market coverage by category and if there were any critical channel/retailer gaps we needed to account for.
In both of these growth strategy examples, market sizing was a critical input for resource allocation and prioritization.
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