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Bankruptcy InformationHow to Size an Emerging Market in Your Business Plan
by:
Dave Lavinsky
In developing their business plans, companies of all sizes face the challenge of crucial the size of their markets. To begin, companies must present the size of their “relevant market” in their plans. The relevant market equals the company's sales if it were to capture 100% of its specific niche of the market. Conversely, stating that you were competitive in the $1 trillion U.S. health care market, for example, is a telltale sign of a poorly reasoned business plan, as there is no institution that could reap $1 trillion in health care sales. Shaping and communication a credible relevant market size is far much powerful than presenting generic industry figures.
The challenge that galore firms face is their inability to size their relevant markets, particularly if they are competitive in new or quickly evolving markets. On one hand, the fact that the markets are new or evolving is the reason why there may be a large chance to establish them and become the market leader. Conversely, investors, shareholders and senior management are often skeptical to invest resources because, since the markets do not yet exist, the markets may be too small, or not actually exist at all.
Growthink has encountered the challenge of size emerging markets many
times and has developed a proprietary methodology to solve the problem. To begin, it is critical to understand why traditional market size methodologies are ill-equipped to size emerging markets. To illustrate, if a research firm were to use traditional methods to size a mature market such as the coffee market in the United States, it would-be consider demographic trends (e.g., aging baby boomers), psychographic trends (e.g., accrued health consciousness), past sales trends and consumption rates, cost movements, rival brand shares and new product development, and channels/retailers among others. However, conducting such an analysis for emerging markets presents a challenge as some of these factors (e.g., past sales, demographics of the client once
there are no current customers) don’t exist because the markets are presently untapped.
The methodology required to size these new markets requires two approaches. Each approach wish yield a some approximation of the potential market size, and often the figures wish activity together to provide a solid foundation for the market’s potential. Growthink calls the 1st approach “peeling back the onion.” In this approach, we start with the generic market (e.g., the coffee market) that that institution is trying to penetrate, and move out pieces of that market that it wish not target. For instance, if the institution created an extremist high-speed coffee maker that retailed for $600, it would-be ab initio reduce the market size by factors such as retail channels (e.g., mass marketers would-be not carry the product), demographic factors (lower financial gain
customers would-be not purchase the product), etc. By peeling back the generic market, you eventually wish be left with only the relevant portion of it.
The second methodology requires assessing the market from some angles to approximate the potential market share, respondent questions including:
- Competitors: who is competitive for the client that you wish be serving; what is in their product pipeline; once you release a product/service, how long wish it take them to enter the market, who else may enter the market, etc.
- Customers: what are the demographics and psychographics of the customers you wish be targeting; what products are they presently
exploitation to fulfill a similar need (substitute products); how are they presently
buying these products; what is their degree of loyalty to current providers, etc.
- Market factors: what another factors exist that wish influence the market size – government regulations; market consolidation in related markets, cost changes for raw materials, etc.
- Case Studies: what another markets have experience similar transformations and what were the client adoption rates in those markets, etc.
While these methodologies are often much conscientious than traditional market research techniques, they can be the difference in crucial whether your institution has the next iPod or the next Edsel.
Just about the author:
GT Business Plans has developed over 200 business plans for clients that have jointly raised over $750 million in financing, launched many
new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital
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