1 Market Sizing & ValidationProf. Mark Wolters March 3, 2017 @woltersworld
2 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 @woltersworld
3 Case Questions & Valid New Venture QuestionsHow 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? @woltersworld
4 Market Sizing Estimating the size of something from little hard dataHow 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 @woltersworld
5 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 @woltersworld
6 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, @woltersworld
7 Where to get the data… From OutsideSecondary 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 – tons of information, but you can do it! Roebuck did it & so can you! @woltersworld
8 Issues with Secondary DataWhat 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, @woltersworld
9 Where to get the data… From InsidePrimary 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, 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 @woltersworld
10 Industry Analysis: Version 1: Top DownSecondary Estimates of Market Size Market Share Estimates Company Revenue Estimates @woltersworld
11 Industry Analysis: Version 2 Bottom Up# of Buyer Purchases per Year Units per buyer, per purchase, price per unit Number of Buyers @woltersworld
12 Common Market Data That You Should KnowUS 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! @woltersworld
13 Estimating Market PotentialIdentify 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” @woltersworld
14 Estimating Market Potential – bottom up-ishThe 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 What happens when U of I says students MUST study abroad to graduate, how does that change it? @woltersworld
15 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 @woltersworld
16 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? @woltersworld
17 Develop a Hypothesis & Market AssumptionsStart 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 @woltersworld
18 Dive into the details Assume 300 Million people in the US60% 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? @woltersworld
19 Sales & Profit ForecastingIs 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… @woltersworld
20 Establish Avg Selling PriceEstimating Sales Est market potential Buying Chain Reaction (from before) Top-Down/Bottom Up (from befre) Establish Avg Selling Price Competitive pricing – set price based on competitors Price Skimming – iphone 4 vs 5 vs 6 pricing Price Penetration – Introductory rate of $19.99 Est Sales Forecast Market potential times average selling price @woltersworld
21 Sales Forecast Example – study abroad students for International ProgramsTotal Estimated Prospective Buyers (COB students) 3000 Target Market (60% of COB go abroad) x 60% Promotional Response (25% go each year mostly JR year) 25% Average Unit Selling Price ($4000 per program) $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) @woltersworld
22 Netflix in Portugal - Projected Sales Forecast with 5% GrowthYear 1 Year 2 Year 3 Year 4 Market Demand (Households who want on demand internet based entertainment out of 10MM people) 1,000,000 1,050,000 1,102,500 1,157,625 MKT Growth Rate (the crisis is behind us & Portuguese are “cutting the chord” 5% Target Market Share (we figure 25% us, 25% Hulu, 25% YouTube, 25% other) 25% Promotional Response – How many of those 25% we think will go for our offer 75% 80% AVG Unit Selling Price (only 50 cent increase a year) $10.00 $10.50 $11.00 $12.00 Forecasted Sales $1,875,000 $2,205,000 $3,201,660 $2,778,300 @woltersworld
23 Summary of some little things you should definitely be able to rattle off to investors easyDefine 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 @woltersworld
24 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 @woltersworld