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Steven R. Kopits
• Market Sizing • Market Share • Industry Structure and Profits
Market Analysis 3 .Market Analysis Trying to establish… Total market size Your company revenues (mkt. share) Your company profits …by market analysis.
Market Sizing Where the market is… 1 2 3 4 1 Establish current market size 2 Establish rate and shape of growth 3 Establish terminal market size (exit point) 4 Establish post-terminal growth (exit value) …and where it’s going. Market Analysis 4 .
who could – but don’t who actually – compete actively compete in today for your your market Current competitors. competitors. customers who compete NOT RELEVANT • for part of your market • nearly your product Market Analysis Broad Narrow A competitor is defined from the customer’s perspective 5 .Current Market Size Market Size = Your sales + sales of all competitors Product/Service Primary Geographic Secondary Current Current competitors.
the Pepsi in a 2L bottle? Market segmentation can be a subtle thing – but it is the customer’s perspective that matters Market Analysis 6 . Do these drinks compete against each other? What if the Coke is in . A customer goes into a convenience store on the boardwalk. He wants a drink. He can buy a warm Pepsi or a cold Coke (from a refrigerated case).Case Study It’s a summer’s day. 2pm on the beach. 33L cans.
Shape of Growth Sales ($) Declining industry • Declining absolute growth • Declining relative growth • Low P/E’s Mature industry • Constant absolute growth • Declining relative Growth industry growth • Stable P/E’s • Increasing absolute growth • Constant relative growth • High P/E’s Which industry are you in? Market Analysis Time 7 .
New Tech Industries Why this shape? Market Analysis • High unit costs • Poor organization • Changing business model • Long sales conversion cycle • Customer ignorance/resistance Slow up-take of product or service 8 .
Sales Conversion Cycle Selling to corporates: entrepreneur experiences – Good initial meeting – Quick formal proposal But corporates respond with – – – – – – – Lack of clear decision-making process No clear decision-makers Lack of urgency Preference for established suppliers Turf battles Risk-averse manager behavior Lengthy trials to become established supplier Conversion cycle can take 2 years for corporate client Market Analysis 9 .
if… Aim for the green boxes. Market Analysis 10 .Customer Inertia/Ignorance Competitive Environment Value-added Low High No Competition Value-added Low High Customer Perceived Switching Risk Low One more… A step up… Low Don't bother me… Gotta have it… High NO SALE Sounds complicated… High NO SALE Well.
sales endurance Market Analysis 11 . delays CSF: track record. Gevalia coffee CSF: credibility (brand awareness). demonstration.g. multiple decision-makers. efficient production • A step up… – – – Clearly superior product in a broad existing selection E.g. financial strength. toothpaste) Critical Success Factors (CSF’s): brand awareness. but complex. trials.Customer Inertia/Ignorance • One more… – – – Another product in a broad existing selection E. product in an existing selection E.: broadband internet access. efficient and broad distribution. proven product.: major corporate softwares Characteristics: long and opaque decision-making process.: FMCG’s (Coke.g. word-of-mouth recommendations • Sounds complicated… – – – – Superior.
: new production technology CSF: client relation skills.g. project management skills Market Analysis 12 .• Don’t bother me… – – – Customer Inertia/Ignorance Clearly superior product with no strong alternative. but non-material. core to client E. alternative telecom provider to corporate client CSF: right contacts. if… – Clearly superior. non-core to client E. trials and R+D focus. timing.: Viagra CSF: show up • Well.g.: energy efficiency project. core to client—client will work with vendor for successful outcome – – E. complex product with no clear alternative. good at customization and documentation. simple purchasing process • Gotta have it… – – – Clearly superior product with no alternative.g.
length of approval. initiator/champion. Get information. who can veto – How approval occurs (p&l ownership. trials) Do not speculate. Market Analysis 13 . Ask. rounds/levels – Timing (cycle. identify – Absolute benefit (in $) to customer – Relative benefit (% of expenses) – Strengths and weaknesses of current solution – Perceived risk Corporate Market Surveys • Decision making process – Who can approve.• Ask potential customers about their needs • For the product or service.
Letters of Intent • Describes the position of the potential customer with regards to your product or service • Signal customer willingness to buy. useful for VC’s • Can be an extension of a marketing survey—asking can be better than selling! • Should be specific – – – – – – – – Detailed description of customer need Detailed description of the proposed product/service Price Timing Required approvals Key conditions Key limitations Risk assumption • Non-binding To have value. an L-o-I must be specific. Market Analysis 14 .
bottom up Market Analysis 15 .Market Share • Based on your relevant market – Your competition from the customer’s perspective – Your geographic area – The market you can and plan to serve • You can refer to total market for establishing market share in percentage terms • Assess the market both top down.
Potential Market Share Strategies • Price leader – No. 1 in market share – Economies of scale – First mover? • Quality leader – Superior product/technology – Strong organization • Middle of pack – Good technology – Reasonable price • Minor player – Niche market Market Analysis 16 .
Industry Structure • Market share depends on industry structure • Geography – National. sales. purchasing. R+D. financing. low scalability What is your current industry structure? What will it be at exit? Market Analysis 17 . brand awareness/credibility – More typical in mature industries • Fragmentation – Customer ‘stickiness’ – High switching costs – Low economies of scale. regional. distribution. or global • Concentration – Significant economies of scale • Production. advertising.
lots of capital. too small or difficult for major competitors 10-15% 5-8% <10% <5% Which are you? Market Analysis 18 . good execution. 'first mover' superior R+ D. not too R+ oriented D good understanding of a specific market Market Share Concentrated Fragmented 20-60% 15-25% Quality leader Rank: 2-6 Middle of pack Rank: 4-8 Minor player Rank: below 8 15-25% 10-15% good price. loyal customers occupy niche. acquisitions. modest capital.Share Strategies by Industry Structure Strategy price leader Market leader Top 3 quality leader Requirements simple business model. good mgmt organic growth. flexible service. superior technology or organization.
Comparative Advantage • Situational (Soft) Advantages – Smarter. harder working management – No response from competitors • Structural (Hard) Advantages – Based on structural characteristics of the business vs. competition VC’s prefer good – but not necessarily brilliant or macho – management leveraging a structural advantage Market Analysis 19 .
Some Structural Advantages • Employee compensation structure • Geographic coverage • Mix of products • Decision-making process • Brand positioning • Distribution channel • Skill set • Capital Market Analysis 20 • Credibility • Production equipment • Unions • Regulation • Cost structure • Ownership • Corporate culture .
Forecasting Profit Margins Profit margin is function of – Market share – Industry structure – Industry growth – Company comparative advantage Internal factors Understanding market forces are key in projecting future profit margins Market Analysis 21 External Factors from market analysis .
Normal (m iddle of pack) Intense Extreme (m inor player) Market Analysis 22 .Typical Profits Margins Pre-tax Net Income/Sales Industry Growth Degree of Competition Low None (m onopoly) Med +10% +5% 10% -5% -10% High +15% +10% +5% + 0% -5% Low: <8% real revenue growth Med: 8-16% real revenue growth High: 17+ revenue growth % +5% + 0% -5% -10% -15% Limited (m leader) kt.
Post-Terminal Values • A note about valuation – Exit profit margins and post-terminal growth prospects will determine postterminal values Market Analysis 23 .
future growth prospects 24 .Terminal Market Size 350 300 250 Sales 200 150 100 50 0 YR1 YR5 Time YR10 Post-terminal growth Reality check 25% CGR 15% CGR 8% CGR Market Analysis Terminal value: reality check.
com Market Analysis 25 .kopits@gmail.Contact Detail Steven Kopits mobile: +1 508 685 1200 email: steven.