Avoiding Pitfalls in Market Sizing Studies

How one deciphers the size of the addressable market for any product or service will greatly impact any business plan. Despite the best intentions however, this is a task that is often poorly executed.

We ask GIA’s Director of Product Management, Aleksi Grym, for his views and observations from his experience as an analyst and strategy consultant over the last 10 years. Aleksi is an economist and Fulbright scholar.

How is Market Sizing erroneously used sometimes? What are the questions that Market Sizing studies should not be expected to answer?
Market size is a very important metric for decision-makers and it's useful to know some of the intricacies involved. First of all, there is a difference between the absolute size of the market and the market that one company can capture, called the addressable market, so these should not be confused.

Another common pitfall is to take market size estimates literally to the last digit. Market size estimates are never very accurate. That's why market sizes should always be accompanied by some analysis of market growth drivers and competitive forces, which are just as important factors to a company's success.

What advice do you typically find yourself giving to clients on Market Sizing best practices?
The most important word in market sizing methodology is "triangulation".

Since market size estimates are never very accurate, it's important to get as many independent estimates as possible. A good market sizing method combines statistical analysis with primary research and uses as many independent data sources as possible. The result will be a range of estimates that give an indication of the true market size. That is much better than just one estimate, which may be completely off the mark.

The principle that "it's better to be broadly accurate than precisely inaccurate" applies very well to market sizing.

With changes in the market, such as rising protectionism and tighter credit, how has determining Market Attractiveness changed recently?
In my view, the method of determining market attractiveness hasn't changed, but the criteria of what constitutes an attractive market have.

Plans to expand business or to locate production are being reconsidered by many companies as the global economy is going through a kind of adjustment period. This calls for a reassessment of market attractiveness. In many markets, consumer behavior has changed and new kinds of government policies have been put in place.

This has opened up new opportunities that a good market attractiveness study is able to identify.

What are some of the more 'traditional' metrics used for Market Attractiveness studies and what are some relatively new ones, due to the changing market dynamics?
In the past few years, growth rates and consumer spending were seen as key attractiveness metrics. With the economic crisis, we have learned that much of that consumer spending was the result of easy credit and eventually unsustainable.

Today, companies are more careful and want to see solid foundations for sustainable growth. Another factor that has increased in importance is government activity. The political and regulatory framework is now a critical determinant when assessing the attractiveness of a market.

What do you enjoy most from such studies?
Market analysis is quite abstract and analytical, so I always find it nice to see plans successfully executed. I remember more than one occasion where a new product has been successfully launched or a new market has been successfully captured. One could literally see the results of the analysis come to life! Those are always good moments.