Market Sizing – Old vs. New Markets


I was attempting some market sizing activity this week. It’s something I haven’t done for a few months and quite frankly I’d forgotten how hard it was.

I start from a premise that the future is completely unpredictable. Really, aren’t we kidding ourselves when we think we can predict how many people will buy our widget and at what price? But then this seemed rather defeatist, and I have seen market sizing produce some value, so I thought I’d try and break the problem down a bit.

The other think I noticed this month was how much fruit-specific cutlery there is out there. You can buy a Kiwi spoon, a Mango splitter, a Grapefruit spoon and endless other tat to fill your kitchen drawers. So I thought I’d use this as an example market sizing task, focussing on a new, brilliant product idea I had, the “Apple Knife” (patent pending) – a knife specifically designed for cutting up apples with a fork bit on the end for picking up the pieces. I know, genius.

So the usual method I use for market sizing is the standard “Start big, and narrow down” approach. And I try to use some sort of staging for this, a version of which is described here – try to define some sort of Total Addressable Market (how big would this market be, if we had 100% market share?) and then calculate some proportion of this, based on how many people we can reach, what market share we might able to get and so on. As a massively over-simplified example, for our wonderful Apple Knife product:

  • People in the world – 7bn
  • People who regularly eat apples – 1bn (I have no idea, btw)
  • People in the UK who regularly eat apples – 60m (we’re only going to sell to the UK to start)
  • Households – 26m (realistically, we’re only going to sell one per household)

So, in theory, so far,  our Total Addressable Market is 1bn knives – if every person in the world who ate apples bought one, this is what we’d sell. I don’t think this will happen. So we have to start narrowing down the numbers.

NB: You can always narrow the numbers down in different orders – addressable geography first,  or # of households first? I’m not sure it matters, but generally certain orderings are easier than others (e.g. it’s easier to find the number of households in the UK than it is in the whole world).

Anyway, here’s where it gets interesting. If I were a naive presenter on the Dragon’s Den, I might go in and argue – 26m knives will be sold in the UK, at £5 each, makes a total market of £130m, ker-ching! (let’s ignore things like manufacturing and marketing costs for now).

But, I suspect the dragons would have something to say about this. The next stage in the narrowing process is the most important and, I think, the most difficult – how many people will actually want to buy an Apple Knife? To continue our sizing process:

  • People in the world – 7bn
  • People who regularly eat apples – 1bn
  • People in the UK who regularly eat apples – 60m
  • Households – 26m
  • Households that will actually want one – 26m x n%

And the key of course here is, what is the value of n? If we think everyone will want one, it’s 100%, great. But, if we’re being slightly more realistic, n could be as low as 0.01% – leaving us with a total market of £13,000 (26m x 0.0001 x £5) – somewhat less attractive as an investment opportunity. Or even less of course (I’m going off the idea more and more, as I think about it).

I think the first parts of the market sizing, if not trivial, are much easier than the latter parts. It might not be easy to find, say, “The number of companies in the US that sell products online”, or whatever your top level numbers are for your business, but that’s a number which can, reliably be found – if I do the hard work to find that number of businesses, say 1.3m, then that number is correct and won’t change for a while.

The latter numbers (or percentage multipliers) are very unpredictable however. But not completely – what are the tricks for improving the accuracy of this figure? I think this really depends on how new or old your market is. And this exists on a scale. With our Apple Knife example,  there are the following possibilities:

  1. We’re already in the specific apple knife business. We’ve been selling them for 30 years, and have been selling around 2,500 per year. We reckon our new model is a bit better than the old one, so we hope to see this go up to around 2,700 per year. But it might not, so a reasonable forecast for market size is somewhere between 2,500 and 2,700 – pretty accurate.
  2. We’re already in the “fruit cutlery” business selling around 5,000 kiwi spoons a year. We’ve got a pretty good understanding of the supply-chain, the market, we’ve spoken to our outlets, to see what they think etc, and have come up with estimates of between 1,000 and 5,000 apple knife sales a year based on that. This isn’t as accurate as “a new version of the same product”, but at least it’s close. There are also subtleties to do with how close different markets are – may be there’s a separate market for “exotic fruit cutlery” with particular dynamics? Or the soft-fruit vs hard-fruit cutlery markets are different in interesting ways? I have no idea, but the principle here is – you’re not starting from scratch.
  3. You are starting from scratch. You’re a company that currently makes electroplating chemicals and have lots of spare cash to spend; and you think apple knives is an interesting market for you. Ignoring concerns I might have that you have no idea what you’re doing in the new market, have no reach, no brand, no unfair advantages etc etc (see my post here), you also have the issue that you have nothing to base your market sizing figures on – how on earth can you estimate these numbers (though see caveat below about stealing other peoples’ figures). You might have a go and estimate figures of between 1,000 and 20,000, but who knows?
  4. Brand new product/market. I’ve trawled Google, and I haven’t been able to find an apple knife for sale (I can’t imagine why!). So not only do you have no info about potential market size, but no-one does. Here, how do you know whether all 26m households will buy an apple knife, or not one single one?

(NB: There’s a caveat here about access to competitors sales information. You might not be in the apple knife business yourself, but if you know a competitor who is, and have seen their sales figures – or can work them out from revenue etc – then that’s a great start. However, it doesn’t take into account massive differences such as market reach, brand, channels and other barriers to entry that differentiate the competitor from you. Nevertheless, looking at other companies’ revenue is a great check – if the biggest player in the market is only make £50,000 revenue per quarter from fruit-cutlery sales, that’s a good ceiling on your estimates..)

Most examples I hit upon fall in to one of these four categories. A I say, the early parts of the calculation are relatively easy, but the latter parts, if your problem falls in to the last couple of categories – and most interesting innovations and product ideas do –  are very difficult indeed.

And the basis of the problem – it’s almost impossible to predict take-up of a new product or a new innovation. If you’re producing a new laser printer, with slightly better functionality than others, at a slightly lower price, you can have a good stab at market sizing. But what if you’re innovating to provide a fundamentally different way of solving a pain-point – a pain-point which might not even be addressed at all at the moment? Though we all like the certainty of saying “This idea could make us £10m!”, we really are kidding ourselves. Instead, I prefer a more experimental, research based approach where we start on a new idea in a cheap or lean way (make a version of the apple-knife yourself and stand outside John Lewis, showing it to people and see how many would buy one), then start making forecasts when you have some idea of need and interest from the customers. E.g. if 1 in 1,000 people you asked said they’d buy an apple knife, that’s not a bad start. Though I think I’d be lucky to get that much interest..


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