Quantitative methods for sizing markets

Quantitative Methods for Sizing Markets

6/19/2003

Ilya MirmanVice President, MarketingSolidWorks Corporation

Agenda

• Some considerations on market sizing• Cook-book approach• Available resources• International market sizing• Finding sweetspots

Readily-available Market DataMay Be Hard to Find• “The data available about market

characteristics, competitors, and so on, is frequently inversely related to the real potential of an opportunity; that is, if market data are readily available and if the data clearly shows significant potential, then a large number of competitors will enter the market and the opportunity will diminish.”

Jeffrey TimmonsNew Venture Creation(©1994 McGraw-Hill)

Sizing Techniques

• The golden rule: no one source of info is that reliable, or complete!

• So it’s better to use multiple approaches to “triangulate” on the real numbers

• Metrics that correlate with usage– Government databases– Relevant publications’ reader studies– Commercial databases

Some key questions to ask…

• Is this the primary product produced at the customer? Or is it one of the things that facilitates their business.– Communications Equipment at Lucent…vs– Packaging Machinery at Procter & Gamble

• What industries are the sweet-spots for this product/segment?

• Is this a MARKET or a POTENTIAL MARKET?• Do I want a worldwide overall assessment, or at

the local level?

Several Approaches• Top-down• Bottom-up• Published reports• Which metrics matter?

– Revenue of current competitors– Firms– Size of problem

• “Total Available Market” vs “Annual Spending”• Today’s talk is focused on Total Available Market

Building the “Total Available Market” (TAM) Model

1. Find a widely-available metric that correlateswith demand for your product

2. Carry out statistical analysis to identify the scaling factor between demand and this metric

3. Get database with the metric by industry and geography

4. Build the model5. Verify model’s predictive power

1. Find a widely-available metric that correlates with demand for your product

• Firms in certain industries• Employment in certain industries• Particular occupations in certain industries• Spending on certain categories• Subscription bases of certain magazines• Etc.

Seats VS Customers(for 50 U.S. States)

10

100

1,000

100 1,000 10,000Mechanical Engineers in State (#)

Solid

Wor

ks S

eats

in

Stat

e (#

)

Example of metrics that correlate with demand

Seats VS Readers(for 50 U.S. States)

1

10

100

1000

0.10% 1.00% 10.00%

Trade Magazine Subscribers in State (#)

Solid

Wor

ks S

eats

in S

tate

(#)

Example of metrics that correlate with demand

Example of metrics that correlate with demand

Subscriptions VS MechEng's in Industry

10

100

1,000

10,000

10 100 1,000 10,000

AVG Subscription in 3-digit SIC

ME'

s Em

ploy

ed in

3-d

igit

SIC

Example of metrics that correlate with demand

Trade Mags' Subscribers VS ME's in State(for 50 U.S. States)

0.10%

1.00%

10.00%

100 1,000 10,000

Mechanical Engineers in State

% o

f Tra

de M

agaz

ine'

s Su

bscr

iber

s (%

)

2. Carry out statistical analysis to identify the scaling factor between demand and this metric• Need not be exact• A top-down approximation may be enough• Primary use will be to compare relative opportunities of

various industries and geographies• Examples:

– 1 software seat per each firm of 50+ employees– 1 software seat per 20 workers– 5 software seats for each mechanical engineer– $1,000 for each $100,000 spent on fabricated metal

structures

Scaling Factors May BeIndustry-Specific• Example: want to use “Employees” as the metric• Two industries with different employment

characteristics may have 2 different scaling factors• Example:

– Target customer: IT administrator– Manufacturing sector: ~1 IT admin / 100 workers– Financial Services sector: ~1 IT admin / 25 workers

3. Get database with the metric by industry and geography

• Not always obvious• Be creative• Be resourceful

• Here are some ideas…

Government Databases

• Fairly comprehensive:– Industry– Zip code– State– Firm size

• The caveats:– Don’t distinguish between type of location (sales,

design, manufacturing, etc.);– Don’t provide names of firms;

Commercial Databases

• Harris Infosource http://www.harrisinfo.com/

• OneSource http://www.onesource.com/

• Corptech http://www.corptech.com/

• Thomas Register http://www.thomasregister.com/

• InfoUSA http://www.infousa.com/

• The Problem: incomplete databases (not all firms are included). Nonetheless, good for relative market sizing.

Useful Websites• U.S. Census Bureau http://www.census.gov/

• The 1997 Economic Census http://www.census.gov/prod/www/abs/97ecmani.html

• 1997 Economic Census Reports http://www.census.gov/epcd/www/ec97stat.htm#SUBJECT

• Industries Ranked by Growth http://www.census.gov/epcd/ec97sic/RANKUSD.HTM

• Statistics by US State http://www.census.gov/epcd/www/97EC31.HTM

• Massachusetts statistics http://www.census.gov/epcd/www/97EC_MA.HTM

• U.S. Bureau of Labor Statistics http://www.bls.gov/oes/1998/oessrch.htm

• Industry Quick Reports http://factfinder.census.gov/servlet/IQRBrowseServlet?_ts=73639935829

• Bureau of Economic Analysis http://www.bea.gov/bea/uguide.htm

• Census Bureau’s CD/ROMs http://www.census.gov/mp/www/rom/msrom.html#County

• County Business Patterns http://censtats.census.gov/cbpsic/cbpsic.shtml

• International Statistical Agencies http://www.census.gov/main/www/stat_int.html

• Department of Commerce http://www.commerce.gov/economic_analysis.html

• Economic Census Reports http://www.census.gov/epcd/www/econ97.html

• Related Census Sites http://www.census.gov/main/www/stat_fed.html

• State of the Nation http://www.stat-usa.gov/econtest.nsf

• Trade Data http://www.stat-usa.gov/tradtest.nsf

• Census Bureau Access Tools http://www.census.gov/main/www/access.html

• Business Counts in a Particular SIC Code http://www.melissadata.com/Lookups/sic.asp?

• Audits of Business Publications http://www.bpai.com/index.htm

Published reports (hardcopy, PDF)Structured databases (.XLS and .DBF)

Published reports (hardcopy, PDF)Structured databases (.XLS and .DBF)

Free from the Government:Amazingly Detailed Data

Free from the Government:Amazingly Detailed Data

Free from the Government:Amazingly Detailed Data

Getting Demographics fromIndustry Publications’ Auditshttp://www.bpai.com/index.htm

Subscribers: By Industry

By Geography

Simple Database Manipulation

4. Build the Model

• Could be a simple 1-parameter formula, or a more complex multi-factor model

• Driven by:– Who will use it?– How?– Required accuracy?– Relative market assessment?– By geography?– By industry?– Sales territory assignment?– Product development/investment decisions?

Building the Model: Which Industries Matter?• Need to filter out irrelevant industries!• A good starting point is your current customers or

prospects• Dun & Bradstreet can append company

demographic information to your customer data:– Size– Revenue– Standardized categories of line of business, SIC

codes– Etc.

The Categories

• No one universal way to categorize companies, markets, segments

• Most companies do more than one thing!• Categorization approaches

– Text descriptions– Structured codes (SIC, NAICS, others)– SIC is most popular, being gradually replaced

SIC Code Primer• SIC Codes are 2-, 3-, and 4-digit codes that refer to progressively

detailed industry classifications.• In the example below, we see how the 2-digit SIC Code #35 can be split

into several 3-digit categories, and how one of them (#356) can be further split into seven more – each one with more detail.

• Further still, 3565 (Packaging Machinery) can be broken down further, by product code; Examples:

– 35651-23: Cartoning & Multipacking Machinery– 35651-27: Paper, Film & Foil Wrapping Machinery– 35651-45: Capping, Sealing & Lidding Machinery– Etc.

351 Engines and Turbines352 Farm and Garden Machinery353 Construction and Related Machinery354 Metalworking Machinery355 Special Industry Machinery356 General Industrial Machinery357 Computer and Office Equipment358 Refrigeration and Service Machinery

30 Rubber And Misc. Plastics Products31 Leather And Leather Products32 Stone, Clay, And Glass Products33 Primary Metal Industries34 Fabricated Metal Products35 Industrial Machinery And Equipment36 Electronic & Other Electric Equipment37 Transportation Equipment38 Instruments And Related Products

3561 Pumps and pumping equipment3562 Ball and roller bearings3563 Air and gas compressors3564 Blowers and fans3565 Packaging machinery3566 Speed changers, drives, and gears3567 Industrial furnaces and ovens

Sample Industry Breakdown ofCustomer Database

354 - Metalworking Machinery

356 - General Industrial

Machinery

367 - Electronic Components and

Accessories

359 - Industrial Machinery

382 - Measuring and Controlling

Devices

355 - Special Industry Machinery

353 - Construction and Related Machinery

372 - Aircraft and Parts

371 - Motor Vehicles and Equipment

366 - Communications

Equipment

362 - Electrical Industrial

Apparatus

358 - Refrigeration and Service Machinery Other

• Typically, just a few SIC codes are relevant, making the database work simpler

Example 1

• Opportunity Predictor at the 5-digit ZIP level

• Works for single ZIP code, or a range

Example 2

Employment Across Six Industries

0%

20%

40%

60%

80%

100%

MotorVehicles

PlasticsProducts

Electronics FabricatedStructural

MetalProducts

Aircraftand Parts

MedicalProducts

Empl

oyee

sMachinists

Maintenance and RepairWorkers

Mold Makers and Operators

Cutting, Punching, and PressMachine Operators

Electronic Equipment Assemblers

Welders, Cutters, Solderers, andBrazers

Inspectors, Testers, Sorters,Samplers, and Weighers

Engineering Managers

First-Line Supervisors/Managers

Team Assemblers

• Labor workforce comparison across 6 industries

Example 3• Engineers by state

5. Verify model’s predictive power• Don’t release unproven data!• Find opportunities predicted by the model• Real Example (medical product manufacturers):

1. Predicted opportunity within 3-digit ZIP codes (based on government database)

2. Randomly picked several locations with high predicted opportunity, verified presence of medical manufacturers with Harris Infosource

3. Overlayed current medical customers as double-check

Let’s take a look…

International Market Sizing

• Rule of thumb: USA is 30-40% of world market (Europe is 40%, Japan+Asia/Pacific~20%)

• Alternative approach:1. Find widely-available metric that drives market

opportunity2. May need to adjust by country-specific factors

(e.g., per-capita GDP)

Looking for sweet spots in your base

Question:• After being in business for 5 years, you have:

– 1,000 customers in industry A– 2,000 customers in industry B

• A new telesales person is starting tomorrow. Which industry should she call into?

…It depends…Several considerations:• Product/industry fit• Current industry spending• Industry size• Channel fit• Geographic channel performance