Market Sizing &

Validation
Prof. Mark Wolters
March 3, 2017
mwolter@Illinois.edu
www.woltersworld.com
@woltersworld
 Today: What’s in it for you?
• Determine how big your potential market is in terms of clients, sales, profits
• Sales forecasting that will really help determining your future budgets
• Where to look for information on your market/industry
• Ratios and models that investors love to see that will show them you might
have a clue about what you are talking about

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 Case Questions & Valid New Venture
Questions
• How many cell phones were sold in the US last year?
• How many Big Macs are sold at McDonalds Restaurants daily?
• How many coffee cups does Starbucks go through in a year?
• How many widgets will you sell in your first year? 5 years?

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 Market Sizing
• Estimating the size of something from little hard data
• How many beers were drank at Unofficial this year?
• What is the market size for a new Nintendo gaming system next year?
• How many coffee cups does Starbucks go through in a year?
• Some Assumptions with these types of questions
• They are rarely stand alone questions
• They are mostly part of a larger set of questions assessing market and sales potential
• Looking at your thinking of how big/small/realistic your potential market size is
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 How do we determine market size?
• It is not an exact science,
• Start by searching for obvious and not so obvious industry information,
• Some data we can find via simple web searches on google, census data,
industry projections, news sources, syndicated data (ACNielsen),
• But that is just the beginning,
• You should use multiple methods to determine market size, we will talk
about two approaches, Top Down & Bottom Up
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 How do we determine which approach to use?

• Data… Plain and simple, the amount of data and the kind of data that you
can collect will determine where you start,
• Best to do both to give your market size estimates more credence
• If you can use both, use them to “triangulate” the most accurate estimate
you can,

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 Where to get the data…
From Outside
• Secondary Data Sources – let someone
else do the hard work for you
• Articles in various media, from journals,
newspapers, magazines, financial reports,
• Trade associations – they are there to
promote certain industries and many
times they have a wealth of information
to share, so use it! Don’t be afraid to ask!
Biggest mistake entrepreneurs make is not
asking for help or free stuff.
• US Statistics – www.census.gov tons of
information, but you can do it! Roebuck
did it & so can you!
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 Issues with Secondary Data
• What is the source?
• Wikipedia is not a source…
• Bias in the sources: Fox News vs CNN on
political polls
• The methodology used in the studies may be
flawed (USPS counting mail on campus
during spring break)
• This is extremely important & will show
investors if you actually have a clue who the
“big boys” are in terms of who knows what
• Quicker to collect than primary
• How relevant is the data collected?
• Timely: Real estate data from 2006 (before
the bubble burst) is not too relevant today
• Relevant: is the GSM market growth rate
relevant for forecasting 4G/LTE growth?
• Inexpensive
• Not hard to search google, costs you next to
nothing,
• $5000 to get the data that Netflix & Hulu get
in terms of viewer numbers & habits,

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 Where to get the data… From Inside
• Primary Source Data – you have to go
out and ask the questions yourself
• Quantitative Surveys – Think of the
ICES forms students fill out on
professors
• Data from Past Surveys – We asked
these questions before, let’s go over
them again,
• Qualitative Survey Data – go out and
ask open ended questions to find out
more about the issues,
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• Why do it yourself ? Why not?
• You ask the questions that are relevant
to you,
• You can formulate all the questions and
know how data is collected (marketers
can lie really well)
• Can gather more insights and
information, reading “Good” and
seeing someone say “Good” are two
different things
• It is expensive, time consuming & you
need people to analyze the data
 Industry Analysis: Version 1: Top Down

Secondary Estimates of Market Size

Market Share Estimates

Company Revenue
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Estimates
 Industry Analysis: Version 2 Bottom Up

# of Buyer
Purchases per Year
Units per buyer, per
purchase, price per unit

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Number of Buyers
Common Market Data That You Should Know
• US Population 2014
• 317 million people
• Senior Citizens +65 years, 43 Million or 13.5% of the population (and they vote in large numbers so
important to candidates to court them)
• Total Households, 116 million
• 4.5% of the global population
• What data is relevant to you? Who are your potential clients? What are their numbers? What has been
their trend over the past decade?
• US Economy
• GDP 15.7 Trillion in 2012 – 60% Services, 30% Goods, 10% structures (Service economy)
• What economic numbers are important to your business? Housing? Income? Education? Find out!
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 Estimating Market Potential
• Identify the Market Segment: Middle Class Travelers who go abroad once every
two to three years
• Establish the Total Market Size: approximately 47 million US trips abroad
• Identify the Number of Competitors: 20 decent travel vlogs/blogs
• Estimate Market Share: 12MM of 500MM views (2.4% of current market, but
could grow in leaps & bounds with AOL, Chinese Television partnerships)
• Take the above together to determine “Market Potential”
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 Estimating Market Potential – bottom up-ish
• The Variables in determining market sales potential
• BUYERS (B) – the number of prospective buyers (B) who are willing and able to purchase an
offering (10% of the U of I student body want to study abroad 10% of 42,000 = 4,200)
• QUANTITY (Q) – The quantity (Q) of an offering purchased by an average buyer in a specific time
period, typically one calendar year. (average student will study abroad once during their time at the U
of I = ¼ = 0.25)
• PRICE (P) – the price (P) of an average unit of the offering (price of study abroad trip $4000)
• Market Sales Potential = B x Q x P
• 4,200 x 0.25 x $4000 = $4,200,000 in potential Study Abroad income
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What happens when U of I says students MUST study abroad to graduate, how does that change it?
 Buying Chain Ratio
• Chain Ratio Method: involves multiplying a base number by several adjusting factors
that are believed to influence market sales potential
• Estimating market potential: MP = N x MS x P x Q
• MP = Market Potential
• N = Total number of potential customers
• MS = Market share – percent of consumers buying from you
• P = average selling price
• Q = average annual consumption

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 Buying Chain Example: How many mobile
phones were sold in the US last year?

• Ask some initial questions for market clarification

• To confirm: we are talking about new sales not total users?
• We are talking about physical phones, not just changing from AT&T to Verizon?
• Do you mean all types of mobile phones or only 4GLTE phones?
• Who is the primary target market?

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 Develop a Hypothesis & Market Assumptions

• Start with all the people in the US

• Realize that only some will have mobile phone service (penetration of the service)
• Typically someone gets a service, and then buys a new phone for one of two
reasons. 1. Turnover or 2. Phones/year
• They change providers or plans
• They want the newest coolest technology iphone 9
• Number of sold phones = People x Penetration x Turnover
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 Dive into the details
• Assume 300 Million people in the US
• 60% of Americans own mobile phones
• Assume three year lifespan of typical phones (I switch out every two when
my contract is up, my dad still has his flip phone)
• Thus: 300,000,000 x 60% x (1/3) = 60 million mobile phones per year
• Yeah! Great job! But ask yourself… Do these numbers make sense? How
could I make the numbers more accurate?
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 Sales & Profit Forecasting
• Is the level of sales a single organization expects to achieve based on a chosen marketing
strategy and an assumed competitive environment?
• We will triple advertising so higher sales versus we split the market 50/50 with Northwestern
• Is some fraction of estimated market sales potential?
• We feel that the iphone 9 will really get people to switch phones faster so that 1/3 should be 1/2
• Reflects the size of the target market chosen by the organization and the marketing mix chosen
for the target markets
• Targeting all students to study abroad or students who meet the 3.0GPA, College of Business
requirements, choosing Amsterdam versus Geneva for a trip will have a different group
• Reflects the assumed number of competitors and competitive intensity in the chosen target
markets – Coke vs Pepsi or U of I versus ISU…
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 Estimating Sales
• Buying Chain Reaction (from before)
Est market
potential
• Top-Down/Bottom Up (from befre)

• Competitive pricing – set price based on competitors

Establish Avg
• Price Skimming – iphone 4 vs 5 vs 6 pricing
Selling Price • Price Penetration – Introductory rate of $19.99

Est Sales
Forecast
• Market potential times average selling price
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 Sales Forecast Example – study abroad
students for International Programs
Total Estimated Prospective Buyers (COB students) 3000
Target Market (60% of COB go abroad) x 60%
Promotional Response (25% go each year mostly JR year) x 25%
Average Unit Selling Price ($4000 per program) x $4000
Forecasted Sales (not profit, but sales) = $1,800,000
Profits (average cost per student is $3700 so $300 per) = $135,000 (8% profit margin)

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 Netflix in Portugal - Projected Sales Forecast with 5% Growth
Year 1 Year 2 Year 3 Year 4
Market Demand (Households who want on 1,000,000 1,050,000 1,102,500 1,157,625
demand internet based entertainment out of
10MM people)

MKT Growth Rate (the crisis is behind us 5% 5% 5% 5%

& Portuguese are “cutting the chord”
Target Market Share (we figure 25% us, 25% 25% 25% 25%
25% Hulu, 25% YouTube, 25% other)
Promotional Response – How many of 75% 80% 80% 80%
those 25% we think will go for our offer

AVG Unit Selling Price (only 50 cent $10.00 $10.50 $11.00 $12.00
increase a year)

Forecasted Sales
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$1,875,000 $2,205,000 $3,201,660 $2,778,300
 Summary of some little things you should
definitely be able to rattle off to investors easy
• Define the market segment & target market
• Define the geographic boundaries of the market
• Define the competition
• Estimate the total market size and market share
• Estimate the market potential
• Estimate an average selling price
• Estimate sales forecasts
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 Thank You & Questions
• A special thanks to Prof. William Qualls for his insight and support in this
presentation (and the slides).
• For more strategy, marketing, entrepreneurship ideas, videos & tips find us at
• www.youtube.com/woltersworld
• www.facebook.com/woltersworld
• www.woltersworld.com
• www.twitter.com/woltersworld

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