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Market sizing techniques – the good, the bad and the ugly

by | 07/12/2021

With so much uncertainty in the economy currently and further disruption no doubt in the outlook for 2022 too, many of our clients have been asking us to measure the size and trajectory of their target markets. This is where market sizing comes in.

Using a variety of secondary market research techniques, we can bring our experience to the table to provide a robust and independent estimate. This article discusses some of the pros and cons of these approaches to market sizing.

Market forecast

Definition of market sizing

In simple terms, the market size of a product or service is the total number of potential buyers within a defined market or geographical area. This is typically expressed in terms of an annual estimate.

For example, in recent years Eureka! have been asked to estimate the market size of:

• Tradespeople who might be interested in a new piece of business support software
• Independent merchants currently selling bathroom sanitaryware in the UK
• Sole traders operating in the roofing and tiling category
• DIY enthusiasts who are likely to undertake home improvements in the next 18 months
• The number of units typically sold in an established part of the heating industry
• Electric vehicle (EV) ownership in a specific tenure type of the housing market
• Consumers who may be interested in trialling a new entrant into the snacking category
• Sole traders operating in the Plumbing and Heating category
• Drinkers who may be interested in trialling a new entrant into the beer category

Many people might assume that market sizing should only be an activity for new start-ups who need to determine the potential viability of their product before launch. Our experience suggests that the process is just as valuable for more established brands, particularly those who are considering new product development, a market realignment, or a brand refresh.

Advantages of market sizing – the good

Understanding the size of your target market allows a business to comprehensively assess their opportunities and accurately plan future investments. Feeding into marketing strategies, these calculations help to ensure a business doesn’t spend too much in a market when return will be low, while also flagging a potential under investment in a high growth or fast-moving market. With so much at stake, it would clearly be unwise to base investment decisions on anecdote or internal assumptions.

As with all our market research projects, one of the first stages we undertake is having a detailed conversation with the client to flesh out objectives and assumptions. This process itself can be critical in helping to better shape the nuances around a true market definition. We bring a fresh independent perspective and ask questions that might not have been asked internally beforehand.

Once we have this information, we would typically base our initial desk research on the extraction of official statistics and administrative data. This could be in the form of Standard Industrial Classification (SIC) based intelligence or financial data accessible via Companies House. Relevant data might also be available from public bodies via Freedom of Information (FOI) requests. We can also use online search metrics where appropriate. Clients are often surprised by the amount of information that is actually publicly available but sadly hidden down complex, jargon-ridden ‘rabbit holes’.

It is often necessary to then apply some reasonable market assumptions, based on professional experience or primary research. This then provides a basis to gross up to a meaningful number of businesses, people or units.

Good assumptions are ultimately the ones that “feel right” to the business and we would advocate that these are discussed with as many stakeholders and industry specialists as possible. We can facilitate this validation work through depth interviews. Sometimes it is necessary to create different scenarios based on some different assumptions and then road test these accordingly.

Challenges with market sizing – the bad

In a fast-moving category, assumptions can quickly go out of date. It is therefore critical to not only be using the most up-to-date official statistics, but also to regularly review the assumptions that are applied to these.

Attitudes and behaviours are quickly changing – are your previous assumptions about technology adoption still valid? Have new routes to market that you didn’t previously consider now come to the fore? Are new legislative or regulatory changes coming in that change the picture?

It is also true to say that many official statistics will sometimes undercount the true picture. For instance, the most detailed measure of businesses in the UK is the Inter Departmental Business Register (IDBR) compromising of over 2.4 million businesses.

Sadly, this data source only captures businesses registered for VAT or PAYE and whilst some improvements have been made to make up these shortfalls in certain SIC codes, this is something that should be borne in mind when making final market assumptions.

Equally there are also some well documented drawbacks to using company accounts information too.

Using an agency such as Eureka! who can act as your critical partner can ultimately help you identify and get over these challenges.

Where market sizing can go really wrong – the ugly

Market sizing can go very wrong when there is a fundamental misunderstanding of the official statistics. Since many of the portals available are not built for the first time user, it can be easy to assume you are looking at the right slice of the data when in fact you are not.

Using an invalid time series, geographical area, or incorrect SIC code are all common pitfalls. It is so important to get this right because if the underlying data are flawed then all the subsequent forecast modelling will obviously also be wrong!

Next steps

As we have demonstrated, we have considerable expertise in this area and would be keen to hear from you to help you map out your potential market. Give us a call or drop an email over to us and we look forward to speaking with you.

Eureka! Research

The Mill | Radford Road | Alvechurch | Worcestershire | B48 7LD

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