HOW TO SIZE A MARKET
The burning question for many private-equity investors is - "How big is the market?" In an era where entrepreneurs are breaking ground in new markets daily, this question is difficult, but not impossible to answer.
Experts are predicting some of the hottest tech trends for 2017 will be
As an example, the Internet of Things promises to materially disrupt our economy with the connectivity of everyday devices, allowing them to send and receive data. Private-equity companies and others are investing heavily in promising IoT technologies. Business Insider predicts that nearly $6 trillion will be spent on IoT solutions over the next five years. The overall market size will be large with McKinsey estimating the total IoT market to grow from $900 million in 2015 to $3.7 billion in 2020 (33% CAGR).
Although the research powerhouses have analyzed the overall market size and provide credible direction for growth, there is little published on niche markets within IoT. For example, how about the size of IoT analytics in a specific vertical like vineyard management? Traditional analytics vendors like IBM, SAP and Microsoft, or cloud service providers like AWS may try to enter this space; however, upstart pure-play vendors may be able to quickly capture market share. What are the opportunities in this market? Does it make sense to enter - organically or through acquisition? The market must be properly sized to answer these questions.
Calculating the Total Addressable Market (TAM) for niche, new, or relatively unknown markets is always challenging. However, it must be done with a degree of precision to understand value and opportunity. We broke the process down into five steps:
1. Compile Existing Secondary Market Research - Although these markets are new, pull all surrounding data. It helps to know the size of adjacent markets, the trends in adjacent markets and perspective on influencing factors. We start with Forrester Research, due to the breadth and credibility of their analysis. A new favorite research tool is Statista, not as comprehensive, but very quick and easy to use.
2. Analyze Top-Down - This takes us back to our McKinsey/BCG consulting interviews with questions like, "How many telephone poles are there in North America?" Start with a verified macro number, like population, then segment the market. Who uses the product? How often? At what price? Provide a source for every assumption you make. For example, if trying to calculate the market for IoT analytics within the agricultural vertical - vineyard management specifically - one approach might be to start with the overall value of IoT in agriculture. Determine the relative percentage that vineyard management represents. Triangulate this with the number of connected devices - total revenue per connected device in total, for agriculture and again for vineyards. Calculate the number of vineyards who could be customers. Apply a price. Are analytics sold per connected device? Price times volume equals revenue. Work on credible estimates for both sides of the equation.
3. Analyze Bottom-Up - This approach is usually more detailed than the top-down. Determine specifics of production and then calculate this number across the market. For example, if trying to calculate the market for IoT analytics at vineyards, you could start with one vineyard. Understand the economics for IoT analytics within a single market. Annual reports of public companies are usually a wealth of information for this analysis; websites and press releases of private companies often include one or two key pieces of data helpful for market sizing and benchmarking. Call vendors to check pricing. Build up the market size piece by piece and then triangulate with your other sources. Is it in the same ballpark as your top-down analysis? Does it make sense given the size of the macro or adjacent markets from the secondary research findings?
4. Verify with the Experts - As much as possible, reach out to experts in the market. Sense check your assumptions. Trade Associations are often incredibly helpful. Always be mindful and specific that you are not looking for confidential information. When working with GLG Strategic Projects, we utilize the GLG expert network to reach out to leaders in their field to verify assumptions and learn more. GLG is a fantastic resource for connecting quickly and professionally with experts. If you are not a client, you can utilize your own LinkedIn network, or make contacts directly.
5. Calculate Sensitivities - Markets are always changing. New markets are especially sensitive to growth assumptions and pricing projections. How do your numbers look if growth happens earlier, or later than expected? What if the market growth and opportunity attracts large entrants that drive prices down? Calculate (and graph) a market range based on the key variables that will impact value.
Entrepreneurs are pushing boundaries on new markets every day. As you look at these opportunities, make sure that market value is calculated with a detailed, analytical and credible approach. There probably isn't a research report available for most of these new, niche markets, but even if there is, it's important to understand and verify the assumptions that drive the calculations to truly understand the market opportunity.
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Sara Conte is a frequent contributor to online discussions about strategy, due diligence, branding and entrepreneurship.