Market Size

MEMBER LOGIN REGISTER

HOME INDUSTRIES & MARKETS OUR SOLUTIONS EVENTS CAREERS ABOUT CONTACT SITEMAP
RETURN TO: Home > Our Services > Growth Consulting > Mkt Measures

QUICK SEARCH
Market Size
All
All Content
Content
Market size is a measurement of the total volume of a given market. When determining market
size, it is very important to define the measurement as precisely as possible. GO

A statement like, "The market for recorders is over $100 million per year," leaves a lot to be ADVANCED SEARCH
desired. What is wrong with that statement? Just like engineering, when monitoring or measuring
a dynamic variable, the measurement must be well defined and all external variables considered. Search our research by date,
For example, if you were testing a jet engine for its vibrational characteristics, you would not just market, technology, region or
document the vibration level of the engine during operation. In a test of this nature you might keywords
also like to note the status of other parameters such as: GO

Engine speed CHAIRMAN'S SERIES ON

Fuel mixture GROWTH

Wind speed ASIA PACIFIC

Wind temperature EUROPE / AFRICA
Time NORTH AMERICA

Oil temperature
LIVE & VIRTUAL EVENTS
Weather conditions
ANALYST BRIEFINGS
Altitude
EBROADCASTS
It is obvious that fluctuations in these measurement variables could influence the engine's EVENTS CALENDAR
vibrational dynamics. For the same reason, when a market manager confidently states that the GIL UNIVERSITY
market for recording equipment is $100 million, we should request documentation on how this
measurement was taken and determine the status of all other relevant parameters to gauge their
GROWTH OPPORTUNITY
impact on the forecast. For example:
NEWSLETTERS
What is the time period? CAREER EBULLETINS
One year (usually assumed) INDUSTRY NEWSLETTERS

Six months
THOUGHT LEADER FORUM
One month
LEARN MORE
What was the date?
CONTACT A CONSULTANT
1986?
1989? Talk to one of our specialists
Asia Pacific:
1991?
+65 68900999
What geographic regions does the market cover? apacfrost@frost.com

U.S. Europe & Africa:

+44 (0)20 7343 8383
World
enquiries@frost.com
Europe/Japan
Latin America:
Nepal
+54 11 4777 1550
What is the size based on? myfrost.la@frost.com

Production Middle East & North Africa:

+971.4.4331.893
Consumption meenquiries@frost.com
How was the market estimate generated?
North America:
Secondary data sources +1.877.463.7678
myfrost@frost.com
Competitor interviews
End-user surveys South Asia:
+91 (0) 22-40013400
Experience saenquiries@frost.com
What is the unit of measurement?
For a full list of our offices
Currency click here

http://www.frost.com/prod/servlet/mcon-mktmeasures-mkt-size.pag[02/10/2010 18:09:03]
Market Size

Units
Volume

What groups are included in your product definition? Learn how subscriptions offer
you better value
Video recorders  GO
X/Y chart recorders
Floppy disks
Hard disks
Learn how we can provide
Film recorders
data and insight for your
Tape recorders specific requirements
Cassette tape recorders  GO

Methods of Measurement

We cannot exaggerate the importance of making accurate measurements of market size. Virtually
all companies make a rough estimate of that parameter and let it go at that. Some of the larger Discover how we can help
companies in broader product segments have a dedicated market engineering staff that accurately your business
tracks the size of various market segments within market segments of the particular industry.  GO
Consider them lucky. However, less-significant product segments that the research community
tends to ignore must rely on experienced "old boy" guesswork or (worse yet) on government
Sitemap | Disclaimer | Privacy
statistics.
© Frost & Sullivan
There are many methods by which you can calculate market size. These methods can be
categorized into two subgroups - the wrong methods and the right methods.

How Not to Determine Market Size

Based on customer demands extrapolated from a small sample size

Based on potential
Based on current rates of production or production capacity
Based on government statistics
Based on a competitor's guess or your boss's guess

Each of these five methodologies will most likely give you an incorrect measurement. Market size
measurements based on customer demand and market potential tend to be on the high side
because both methods extrapolate for all customers from a small sample what an ideal customer
should buy.

Production is also a poor indication of customer demand because production and actual sales are
rarely perfectly coordinated. Government statistics are calculated with very poor methodology and
little regard for accuracy; be careful if you base anything on those numbers.

Typically, market size estimates are based on rumor and expert opinion. For example, we were
talking to the chief executive officer (CEO) of a large manufacturer of industrial equipment. He
asked us to tell him the market size for his product line. We told him we did not know, but he
insisted that he had read an article of ours that discussed the numbers. We finally gave him an
estimate, which he later used in an interview with the Wall Street Journal. For the next two years,
that was the market size the entire industry used as a benchmark.

How to Measure Market Size

There are three ways to measure market size, two of which are based on competition and one of
which is based on customers.

Competitive sales (bottom-up approach)

Competitive sales (top-down approach)
End-user purchases

Of the top-down and bottom-up methods, the bottom-up approach is far more time-consuming
but is more accurate. In essence, it uses a series of interviews with all suppliers to determine
quantities sold by each company in the period. These are added together to give the total market
size.

The top-down approach, which is used most often by research firms, is based on a series of
competitive interviews where each competitor is asked for an estimate of the market size. These
estimates are sometimes weighted and then averaged for the market size calculation.

The last way of calculating market size is based on end-user purchases during the period. If there

http://www.frost.com/prod/servlet/mcon-mktmeasures-mkt-size.pag[02/10/2010 18:09:03]
Market Size

are few end-users, this is an accurate measurement. However, as the end-user base increases,
the cost rises and the accuracy of the measurement falls. A smaller sample will have to be taken
and extrapolated to approximate the entire user population.

What Does Market Size Really Tell You?

Market size is one of the fundamental measurements that must be taken on the market. It is the
standard measurement ruler against which all of a company's activities should be measured.

For example, expenses for an R&D project should be related to market size. The same is true for
sales force and marketing expenses. On one hand, you do not want to over-invest based on
market size. On the other hand, you do not want to under-invest in large, fast-moving markets.

Case Study: Measurement Instrumentation

This client was a 25-year-old manufacturing company founded by three engineers who were then
fresh out of engineering school. Over the years, the firm evolved into a three-division company,
as shown in Figure 1:

Figure 1 - Market Size: Case Study Company Structure

R&D Expense ($
Division Sales (%) Salespeople (#)
Million)

Pressure Sensors 34 24 12

Humidity Inst. 36 25 15

Navigational Inst. 30 20 14

Note: All figures are rounded. Source: Frost & Sullivan

The owners came to us frustrated with the low growth of their company. New products were not
selling fast enough, and the only way they could see to encourage growth of the company was
through acquisition. This represented a problem, however, as one of the three partners was 100
percent opposed to acquisition, another wanted the firm to "stick to its knitting," and the third
wanted to start development projects into newer and exciting markets such as office automation
and telecommunications.

The fundamental problem they had was that none of them really knew where their relative
strengths and weaknesses lay. They had no marketing department per se, although they did have
sales managers and a literature development group. Each division had its own sales support
structure, and was of roughly equal size based on contribution to total sales.

We started on a quick market engineering overview of the company to determine where it was
positioned in the market. As each division was in a radically different product area, we had to
develop three distinct overviews.

The first and perhaps the most important parameter that we determined was the firm's size in
each of the markets in which its divisions competed. Of course, knowing the market size and
volume of sales of each of the divisions, we could immediately calculate market share, as shown
in Figure 2:

Figure 2 - Market Size: Market Share Calculations

Market Size ($
Division Sales ($ Million) Market Share (%)
Million)

Pressure Sensors 40 600 6.6

Humidity Inst. 43 50 86.0

Navigational Inst. 36 110 32.7

Note: All figures are rounded. Source: Frost & Sullivan

This certainly was an eye-opener. It immediately showed us that the firm was looking for greener
pastures while completely overlooking the green grass in its own backyard. It was quite obvious
that the growth we were looking for would most likely be found in the pressure sensor market.

As we previously indicated, each of the company's three divisions was run by one of three
partners. Unfortunately, the non-aggressive partner was responsible for the pressure sensor
market.

http://www.frost.com/prod/servlet/mcon-mktmeasures-mkt-size.pag[02/10/2010 18:09:03]
Market Size

A few simple calculations illustrated the immense potential that lay in the pressure sensor market,
as shown in Chart 1 and Chart 2.

This analysis brought us to the conclusion that if the company had as many salespeople per
market size in the pressure sensor market as it did in the humidity market, there would be 12
times as many salespeople to address that market. Moreover, R&D spending would be increased
by $200 million as well, if it were in proportion to the humidity market.

The Response

The company stopped its investigations into acquisitions and product development outside
its areas of expertise.
The company formed a management committee to oversee all product lines rather than
segmenting the firm into three discrete divisions. The division strategy made no sense
based on market size.
The company began increasing the number of salespeople in the pressure sensor market.
The company decided to increase the sales force by 10 percent per year for three years
and to observe the level of sales per salesperson to determine if they remained stable.
The firm allocated additional funds for product development to grow the pressure sensor
market in line with the two other segments the company addressed.

The Result

The company grew by an average of 11 percent per year over the next three years,
approximately 6 percent higher than over the previous three-year period.
Sales from the pressure instrument division now account for 51 percent of company sales,
and this figure is projected to increase to 75 percent over the next seven years.
Management harmony has increased considerably as management now chooses to base its
decisions on market figures instead of personalities.

BACK TO TOP

http://www.frost.com/prod/servlet/mcon-mktmeasures-mkt-size.pag[02/10/2010 18:09:03]