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Market Sizing - Is it as simple as buying an analyst report?

Posted by Darrin Fleming on Jun 11, 2013 11:10:00 AM
Darrin Fleming

All too often when working with clients, I hear the question asked, “What’s the size of the market?” That’s a question that analyst firms love to hear because they can sell the answer to whomever is asking the question. However, proper market sizing goes much deeper than what a typical analyst firm can answer, and is much more about relative size than precision. A project team that I was working with a while back gave a presentation to their Executive VP about investing in a new opportunity. The company was not currently in this particular market and the team was asking for investment dollars to go after a market that they estimated to be between $5 billion and $6 billion. The executive asked the team “Well, which is it?” The bewildered team asked, “Which is what?” The executive replied, “Is it $5 billion or $6 billion?” The team replied, “We don’t know precisely, but we are confident that it is in that range.” At which time the executive sent the team away to do more research because, as she said: “If you don’t know the market better than that, we shouldn't be investing.”

Obviously the executive was asking the wrong question. The decision to invest didn't depend on whether the market was $5 billion or $6 billion. The right questions would have been:

  1. “Why do we think that we can win in this market?”
  2. “What do we have that will be unique or different from others in this market?”
  3. “Is there a segment of this market where we believe we will have a stronger value proposition?”
  4. "How can we make money in this market?"

The first step people often take when sizing a potential market is to buy an analyst report. They figure that, with just a few mouse clicks, they can find out market size and growth rate with good precision. Easy, right?

Sure, getting the report is easy. And while analyst firms serve a very useful function, the truth is that their reports have some inherent limitations. For the purpose of looking at the potential size of a target market, analyst reports should be only one source of information.

Why is that? For starters, an analyst firm will almost always define a market based on the product or service to be provided. In other words, they will scan the market for existing indications that customers could use or would want your product. What they won’t uncover is indications that don’t yet exist. They also don't address the size of the problem being solved.

At a typical analyst firm, a junior analyst will collect information about the market by calling the competitors in the market. The competitors will provide some form of information based on how they want to be perceived, but typically not actual results (unless of course that information is already publicly available). The analyst will then use that historical data, based upon the questionable responses from the vendors, to project forward the market’s growth rate.

The data will also only take into account customers that have actually bought the product or service, not those that have chosen (either knowingly or unknowingly) to not buy nor those that have chosen to solve the problem in a different way. This omission alone could cause the analyst firm to grossly underestimate the potential market size. The market size will also be based upon the current pricing for the offering in the market, again another faux pas. However, the size and growth rate will be reported with great precision and authority, so we feel good about the answer.

Thus you end up:

  • Taking advice from someone who doesn't know your market as well as you (hopefully) do…
  • Collecting potentially unreliable data from unreliable and/or partially informed sources…
  • Focusing only on established market needs and potentially missing hidden opportunities...
  • Projecting the growth of the current market based only on historical trends…

Other than that, analyst reports are perfect!

All sarcasm aside, analyst reports do provide a good indication of the current market conditions and the competitive landscape. They can also help you understand what’s likely to happen, given no other changes. Provided you understand the limitations, they are a good source of information about the current market and current trends. However, I encourage you not to stop there. Press forward and ask the right questions.

What value do you find in analyst reports? Have they helped you size market potential? Have you seen market sizing exercises go bad? Share your thoughts in the comments.

Topics: Market Strategy