Utilizing an Alternative Method to Effectively Estimate Market Size

Market Size Estimation

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The need for market size

How big is the market? Its one of the most common questions our clients ask. It can refer to a market the client is already in or one it is considering entering. Knowing market size can help:

Evaluate whether a market opportunity merits investment Benchmark against the competition Set performance goals Determine where there is room in the market for organic growth

Segmentation of a market enables refinement of a companys strategies and goals by identifying the most promising geographies, customer types or application areas. This white paper describes an alternative method to estimate market size using secondary research and qualitative input. Before describing this method and presenting some examples, we will summarize standard approaches to determining market size. We will revisit these standard approaches at the end of the paper in comparison to the alternative approach.

Standard approaches
Collect published data
Big markets, the kind that many people are interested in, get a lot of attention. In turn, the high level of interest usually means someone is tracking the market. As a public service, government agencies track markets in which there is broad interest. Syndicated research firms invest in researching markets for which they can sell the results widely enough to generate a return. Similarly, companies like Nielsen1 compile point-of-sale scanner data because they can sell the results to enough clients to earn a profit. Trade associations research markets using their members funds for their members benefit. For the U.S. market, published market size data are common; elsewhere, coverage is less prevalent. Similar sources of market data are available across geographies, although published information is most commonly available for the U.S. market. For markets where published data are available, this data are often sufficient to meet clients needs and is the most cost-effective approach. However, published data are not available for many markets, or is not segmented at the level of granularity needed. Examples of published market size data The U.S. Census Bureaus Annual Survey of Manufactures provides the annual value of shipments of a wide variety of product types, ranging from cat food to rotary oil seals.2 The Aluminium Association publishes the annual rate of U.S. primary aluminium production.3 WardsAuto provides annual vehicle sales data.4 Syndicated market research reports are available on topics ranging from archiving software5 to zinc smelting.6

Market size is not published for all markets. Published data may not be available for small markets or international markets and may not sufficiently segmented. Roll-up competitor sales
Another way to get at market size is to add up what the players sell. For some markets it is possible to estimate market size by determining sales of the largest players and estimating the aggregate share of other, smaller players. This approach is generally only feasible in concentrated markets where there are a relatively small number of leading players. Overall sales figures are available from financial filings for public companies, and estimated overall sales figures are available from published sources like Dun & Bradstreet/Hoovers and OneSource for private companies. Typically, this data need to be segmented into a specific product category and sales estimates for private companies must be verified. This can be done through competitive intelligence interviews, but is challenging in some situations due to the sensitivity of the information being sought.

1 2 3 4 5 6

http://www.nielsen.com/us/en.html http://www.census.gov/manufacturing/asm/ http://www.aluminum.org/ http://wardsauto.com/ Worldwide Archiving Software 2012-2016 Forecast and 2011 Vendor Shares, IDC, August 20, 2012 China Lead & Zinc Smelting Industry Profile CIC3312, Beijing Zeefer Consulting Ltd., May 25, 2012

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Adding up competitor sales to determine market size is not feasible in fragmented markets and relies on the collection of relatively sensitive competitive intelligence. Survey customers
Asking customers how much they spend in the market is also used to determine market size. Within a survey, a sample of customers is asked how much they spend each year on the products composing the market. The results are extrapolated to the full population of customers. The data can be collected via an omnibus survey such as ORC Internationals CARVAN7 omnibus surveys, a panel such as TraQline8 or a custom survey. However, if the customers are hard to reach or if the market penetration is very low an effective survey can be costly.

Determining market size by surveying customers can be costly in B2B markets where customers are hard to reach and incidence is low.

Collect published data

Not available in all cases Accuracy varies Segmentation may be insucient

Roll up competitor sales

Not viable for fragmented markets Requires collection of sensitive data

Survey customers
Costly for hard-to-reach customers Costly if incidence is low

An alternative approach
For markets where standard approaches are too costly or otherwise untenable due to competitive fragmentation, customers that are hard to reach or other issues ORC International has developed a framework for the development of market size estimates. This is not a prescriptive methodology, but a conceptualization that ORC International researchers use to develop an estimation tool that is appropriate to the particular market of interest. Before delving into the details of the approach, there are several items to note.

The present discussion focuses on estimation of market size in units or volume. It is assumed that average pricing can be determined and used to convert market size in volume to market size in dollars. Although the discussion focuses on products, the framework is equally applicable to services. ORC International has used the approach successfully for both. The approach can be used for any geography. Often in practice the same method is used in multiple countries simultaneously to provide geographic segmentation. This can be useful for verification if published information on market size is available only in select countries.

7 http://www.orcinternational.com/US/services/Additional-Services/Pages/Omnibus-Services.aspx 8 http://stevensoncompany.com/traqline/

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Input data and framework

The crux of the alternative market size estimation approach is to identify quantitative data that relates to the size of the market of interest and then develop a quantitative estimate of the relationship. The model relies on two types of inputs: Basis data: Quantitative data available from published sources or a previously conducted survey that is not a direct quantification of the size of the market of interest, but that is related to it. Market segmentation flows from the segmentation structure of the basis data; i.e., if the basis data are segmented by country the estimated market size will be segmented by country. Relational data: Quantitative data that provide the link between the basis data and the target market size. The relational data are sometimes no more than rules-of-thumb, but for many client needs the resulting level of accuracy is adequate.

Basis data

Relational data

Market size

For example, if we wanted to know the size of the chewing gum market in the U.S., segmented by state, we might use population by state as basis data. Relational data then might be the fraction of people who chew gum, how many sticks a week the average gum chewer consumes, and the typical number of sticks in a pack. We could combine the basis data and relational data to estimate the number of packs of gum sold annually in each state, for example Minnesota:

Number of packs of gum sold annually in Minnesota = (Population of Minnesota) x (Fraction of people who chew gum) x (Sticks per week) x (52 weeks per year) / (Sticks per pack)
State-by-state estimates then roll up to the U.S. market. Which basis data should be sought is not necessarily known at the beginning of the process. The market size estimation framework presented graphically on the next page is a tool that helps ORC International researchers brainstorm about what basis data might be appropriate for any target market. Production. Data regarding production of the products that comprise the target market may be used as basis data. For example, the size of production facilities may be used to estimate market size if relational data on production utilization can be estimated. The number of employees engaged in making the product may relate to the volume produced and sold. The amount of raw material or components sold to an industry may be used to determine the volume of product made. Permits for a certain amount of waste production may relate to the amount of product produced. Distribution. Data regarding distribution of the products that comprise the target market may be used as basis data. For example, the size of the sale force may be used to estimate market size if relational data on the intensity of the sales process can be estimated. Import/export data may be useful where domestic markets are relatively small. The amount of packaging used in distributing a product may be an indication of the volumes of the product sold. End use. Data regarding use of the products that comprise the target market may be valuable as basis data. For example, the number of users may be used to estimate market size if relational data on usage rates can be estimated. Consumables sales may be related to durable equipment sales. The market for comparable or related products may be an indicator of market size.

Considering each of the above areas in turn in a brainstorming session will result in one or more possibilities for basis data. After initial brainstorming, secondary research is conducted to determine what data are actually available. Interviews with industry experts are also used to conduct additional brainstorming and identify sources of basis data. Note that many types of basis data lend themselves to division by geography, end user type or application, which allows segmentation of the target market. After one or more options for basis data have been chosen, relational data are sought. Relational data may be available from published sources, but they more typically come from conversational interviews with subject matter experts and industry participants. Many of the individuals suitable to interview work in the domains illustrated in the market size estimation framework above:

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Market size estimation framework:

Production

Source: ORC International

Distribution
Sales force Import / export data Packaging

End use

Facilities Employees Raw Materials Components Permits

Number of users Consumables Comparables

Production. Potential interview contacts manufacture or otherwise create the product or service of interest so they can help us understand what facilities, staffing, raw materials, components, etc. are required for production. Distribution. Interview contacts that sell the product or service of interest can help us understand how the size of the distribution network and similar data relate to market size. End use. Interview contacts that use the product or service of interest can help us understand how many or how much of the product they use, how often they use it, etc.

Subject matter experts, such as industry consultants and academics, can also provide valuable input. Although actual market size may not been known by any of these interviewees, experts and contacts involved in production and distribution often have a good feel for the market. Thus, they may be able to provide a ballpark range of market size and help us understand whether the estimates we develop are reasonable. Differences in relational data between segments are less likely to be available than for basis data. Thus, a simplifying assumption often used is that relational data are uniform across geographies, end user types or other segments. Differences between segments can be ferreted out by conducting additional interviews, but this may defeat the purpose of keeping the number of interviews low and the project relatively simple.

Model development
Once the relevant data have been collected, the market size calculations are conducted. Typically, an Excel spreadsheet is used. For the chewing gum example, if the market were segmented by region, the spreadsheet calculation might look like the following.
Example market size calculation
% of people who chew gum Sticks per week 52 weeks per year Sticks per pack Packs of gum sold annually

Population

Basis Data Region Northeast Midwest South West US Population 55,317,240 66,927,001 114,555,744 71,945,553 308,745,538 % of people that chew gum 25% 25% 25% 25% 25%

Relational data Sticks per week 20 20 20 20 20 Sticks per pack 12 12 12 12 12

Market size Packs sold annually 1.2 billion 1.5 billion 2.5 billion 1.6 billion 6.7 billion

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The resulting Excel tool can be updated and refined as new information is gathered or as conditions change at a later time. For example, further research may uncover regional differences in the fraction of people that chew gum, which could be used to refine the model. Seeking information to allow for such refinements does impact the project cost, so it is important to consider which refinements are really necessary and which assumptions result in sufficient accuracy for the intended purpose. After an initial version of the model has been developed, it is advisable to get feedback on the method and the results via interviews with the stakeholders and with industry participants. This feedback can be used to improve the model and get buy-in from stakeholders. In addition to verifying the results against the clients knowledge and the knowledge of interviewees, there may also be secondary research results such as market size for a single country out of several target countries that can be used for verification. Using more than one method to estimate market size can also increase confidence in the results. In addition to the Excel tool, a Word or PowerPoint report is generally written to document how the model works and what assumptions it is based on, as well as to present the results, including overall market size and any segmentation.

Overall approach
To summarize, the steps illustrated below comprise the approach.
Market size estimation approach

1 2 3 4 5 6 7
Source: ORC International

Define the market of interest. Use the market size estimation framework to brainstorm possible types of basis data to search for. Conduct secondary research to identify available basis data and relational data. Interview industry experts to continue brainstorming, identify additional basis data, and develop relational data. Build the model. This is where a specific method to estimate the size of a specific market is implemented. Iterate and verify. Summarize findings, document the method including all assumptions and deliver the model and report.

Case studies
In practice, the sophistication of the market size estimation method can vary considerably, from a quick back-of-the-envelope calculation of the overall market size to a segmented model with several layers of verification. This flexibility is one of the strengths of the method, since it allows the market sizing project to be tailored to the situation at hand. The following case studies illustrate the breadth of implementations possible.

Orthodontic application of flat wire

A producer of engineered textile tooling for weaving looms such as high-speed harness frames, heddles, reeds, and drop wires used in the production of textiles was seeking growth opportunities. Heddles and drop wires can be described as slender, precise stampings made from thin wire or sheet. The company had developed its own precision-rolling capabilities to produce the precision wire from which the above-mentioned products are stamped. This has allowed it to ensure that the wire used to make its heddles and drop wires has the necessary quality and consistency that is normally not available on the market. Over the years this has led to an ancillary business of supplying precision-rolled flat wire on a contract basis to outside companies. The company was seeking new markets for flat wire to drive growth. ORC International identified several markets that had the potential to be a good fit, including orthodontic archwires. The client wanted to know the size of the U.S. archwire market to determine whether it was worth pursuing. Published data were only available for the broader orthodontic wire market, of which archwire is a segment. The U.S. population 274 million at the time the project was done was used as basis data. Interviews with subject matter experts provided the following estimates for relational data.

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2% of the U.S. population is undergoing orthodontic treatment Each patient receives two archwires per year Stainless steel archwires are $0.50 each, while exotic alloy archwires are $1.50 to $3.00 each

Using the range of prices, a range for market size was determined. Market size in terms of number of archwires = (274 million people) x (2% undergoing treatments) x (2 archwires per person per year) = 11 million Lower bound of market size in dollars = (11 million archwires) x ($0.50) = $5.5 million Upper bound of market size in dollars = (11 million archwires) x ($3.00) = $33 million The actual market size is likely to be closer to the lower than the upper bound, since exotic alloys are not as commonly used as stainless steel. This result was consistent with published data indicating that the broader orthodontic wire market was $29 million.

Testing equipment
An ORC International client had recently acquired a company that made a certain type of material testing equipment. The client needed to know the market size to understand where its acquisition fit into the market and to inform product development decisions. Market size and segmentation by customer type was sought in six countries. Little published information was available on this mature market and sales information for two of the top players could not be obtained. Our approach developed from an experts statement that any automotive, metalworking or aerospace production facility would have this type of test equipment. The number of relevant production facilities was used as basis data. Relational data were the number of test equipment units per facility and the lifetime or replacement frequency of the equipment. Market size was then estimated as follows. Market size in units = (Number of automotive, metalworking and aerospace production facilities) x (Number of test equipment units per facility) / (Equipment lifetime) Market size in dollars = (Market size in units) x (Average price) The automotive, metalworking and aerospace market segments in scope were defined in terms of North American Industry Classification System (NAICS) codes. The relevant NAICS codes were selected collaboratively between ORC International and the client. Groups of 3-digit NAICS codes with some sub-codes excluded by the client provided a natural segmentation of the market by customer type. OneSource was used to determine the number of facilities in each NAICS codes in each country of interest. This data are summarized in the table below for select countries and NAICS codes.
Example of basis data Number of production facilities by customer type and country

NAICS code 331 332 333 334 335

Segment name Primary Metal Manufacturing Fabricated Metal Product Manufacturing Machinery Manufacturing Computer & Electronic Product Manufacturing Electrical Equipment, Appliance, & Component Manufacturing Transportation Equipment Manufacturing

US 8,905 66,510 36,634 11,289

China 5,617 6,635 15,674 5,061

Germany 1,176 3,508 3,641 1,337

Japan 639 1,112 2,101 1,100

8,056

7,446

1,329

1,058

336

13,961

4,113

1,212

812

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Relational data came from discussions with experts. There was agreement that the majority of production facilities would have only one unit of testing equipment. There was some variation on the equipment lifetime, but 10 years was taken to be a solid average. Secondary research on actual equipment prices, plus input from the client, was used to arrive at an average price of $13,000 per unit of testing equipment. Since there is one unit of testing equipment in each production facility, the installed base of testing equipment units is the same as the number of production facilities presented above. Since the equipment lasts 10 years, an average of 1/10 of the installed base is replaced each year. Thus, the annual market size in units is 1/10 of the installed base. Finally, the market size in dollars is $13,000 times the market size in units. This calculation can be done by customer segment as defined by NAICS code and by country to determine how the market is segmented, and then summed to determine the overall market size, as shown in the table below.
Example of results Market size ($ millions)

Segment name Primary Metal Manufacturing Fabricated Metal Product Manufacturing Machinery Manufacturing Computer & Electronic Product Manufacturing Electrical Equipment, Appliance, & Component Manufacturing Transportation Equipment Manufacturing Total

US $11.6 $86.5 $47.6 $14.7

China $7.3 $8.6 $20.4 $6.6

Germany $1.5 $4.6 $4.7 $1.7

Japan $0.8 $1.4 $2.7 $1.4

Total $21.2 $101.1 $75.4 $24.4

$10.5

$9.7

$1.7

$1.4

$23.3

$18.1 $189.0

$5.3 $57.9

$1.6 $15.8

$1.1 $8.8

$26.1 $271.5

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Recap
The market size estimation approach presented here is an alternative to more traditional approaches. It provides results that are accurate enough to base some decisions on, while avoiding the cost of detailed competitive intelligence interviews or a custom quantitative survey. In some cases the results are useful as directional indicators, even if the lack of statistical rigor attainable from other sources or methods impacts projectability. Deciding whether it is the most appropriate solution to any particular need depends on several factors, as indicated by the pros and cons of the methods available summarized in the table below. Ultimately, the method must match the need: characteristics of the market of interest that impact the feasibility of different methods.
Advantages and disadvantages of market size estimation methods

Method

Cost

Accuracy

Advantages Fast turnaround

Disadvantages Published data may not be available, or not segmented

Collected published data

$ $$

Depends on source

Roll-up competitor sales

Medium

Results based directly on sales figures

Dicult for fragmented markets Gaps in obtainable competitive data Segmentation can be challenging

Survey customers

$$$ $$

High

Segmentation can be designed into the survey

Segmentation adds cost

Alternative market size estimation method

Medium

Flexible Excel tool can be refined and updated Data is naturally segmented via basis data

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About ORC International

ORC International is a leading global research firm with offices across the U.S., Europe and Asia Pacific. We offer a platform of integrated intelligence that combines traditional and forward-thinking methodologies, technology, industry expertise, and skilled research professionals to provide clients with the most comprehensive foundation for providing actionable insight to solve their most pressing business challenges worldwide.

ORCs Segmentation Analysis

ORC International provides innovative segmentation research solutions that give you deeper insight on how to best engage a specific market by understanding and tapping into its behavior, attitude and needs. Whether it be a geographic, demographic, or psychographic analysis, our range of segmentation techniques will enhance your ability to: Prioritize customers with the best opportunity for profitable growth Develop more focused and differentiated propositions Tailor sales and marketing messages more accurately Align all aspects of service and support

For more information, please visit our website at www.orcinternational.com or contact: Ashley James Vice President Ashley.James@ORCInternational.com 952.851.7748

About the Author

Ashley James
As Vice President of technology and industrial research at ORC International, Ashley James manages in-depth primary and secondary research projects across a range of industries and oversees a team of researchers. She has experience evaluating opportunities for new technologies; gathering competitive intelligence; analyzing intellectual property; and performing market, technology and competitive assessments. Given her technical background, Ashley is adept at understanding how technical issues impact business decisions. Prior to joining ORC International, Ashley was a professor at the University of Minnesota in the Department of Aerospace Engineering and Mechanics. As a faculty member she performed technical research, taught engineering courses and managed undergraduate and graduate student researchers. In 2006 she earned a Presidential Award from the Bush administration for her research. Ashley has also spent several years working in the power generation industry, first for a major utility in electricity distribution, and then for a turbine/generator OEM. Ashley holds a B.S. in Mechanical Engineering from the University of Florida and a Ph.D. in Mechanical Engineering, with a minor in Mathematics, from the Georgia Institute of Technology.