Target Market Planning & Market Opportunity Sizing
Framework for startups to estimate market size for new product categories in the industrial market
It is often difficult to estimate the market size for new product categories. In fact, many of the startup founders find it difficult to estimate market size for their products, and often end up with estimates & methods that are incorrect. The primary reason for this is they use the wrong set of tools.
The “Top-Down” Approach to Estimate Market Size
It is easy & straightforward to estimate the market size for existing product categories, because there is numerous data available on how big or small the market is. For instance, it would only take a simple Google search to estimate the market size for two-wheelers in India. Making use of already available data to estimate market size is called the “top-down” approach.
On the other hand, estimating the market size for a new product category is difficult, for the obvious reason that the market does not exist yet. For example, there won’t be any data on how big the market is for a VR/AR-based technology that helps manufacturers detect defects in components that goes undetected to the human eye.
Many startups I’ve worked with, in the industry digital transformation space, would present the entire industry 4.0 market size estimation as their product’s market opportunity. But their product would only represent a minor sub-set of industry 4.0—making this estimate & approach incorrect.
Hence the top-down approach is of no use while trying to estimate the market size for new product categories. Because new products are trying to create a market that doesn’t exist yet. There might be some estimates based on some academic research, but in most cases, it would be vague and inaccurate.
The best way to estimate the market size/opportunity for a new product category is to use a “bottom-up” or “value-based” approach.
What is Value?
Value is what customers get or realise by using any product or service—ultimately value is what matters to customers and not how great the product or technology is. The greater the value a product can deliver to its users/customers, the more will be their willingness to buy.
For a product to be successful in the industrial market it should have a compelling business value or impact. In industrial markets, business value can only be in tems of cost savings and/or revenue generation. No buying decision will be made unless the product can do any or both of the two, in other words, the product should offer a good Return on Investment (RoI). Here is a guide to quantifying value.
Value estimation example: One of the startups Forge worked with has developed an AI/ML platform that helps large oil & gas companies avoid labour accidents and deaths resulting in productivity and other losses. The startup has estimated that their product will be able to save around $40,000 per year for a large oil & gas company, so the value the product can offer to its users/customers is $40,000.
Note that a product might cater to multiple industires, but the value it delivers to each industry is likely to be different. For instance, the value a product delivers to oil & gas industry can be different to the value it delivers to the food processing industry.
Value-Based Market Opportunity Sizing
At Forge, we have developed a framework to help industrial tech startups to determine the total market opportunity, demand, and revenue estimation for a new product in a particular market segment/industry.
1. Market Opportunity
This is the total market opportunity out there for a product—the upper limit of how big the chosen market segment is. After estimating the value a product can deliver, multiplying it by the total number of buyers out there would give the market opportunity. For instance, if the chosen market segment is the oil & gas industry, the total number oil & gas companies or plants in the country or a region or globally will be the no. of users/customers.
2. Demand
The demand is a subset of market opportunity — this is the number of customers that a startup can meaningfully go after immediately to sell their product—i.e. the early adopters. As this is a new product/technology, not all customers will immediately adopt the product, so startups need to go after early adopters first. Going by the technology adoption curve, about 20% of the total no. of users/customers can be considered as the demand. But this is not a hard-and-fast rule, the adoption % can be lower or higher depending on the product and the market it is catering to.
The demand is estimated by multiplying the total no. of users/customers times the adoption % times the price of the product.
2. Revenue
The third part is the actual revenue that the startup can generate, say in the next 3 to 5 years. For industrial tech products, this usually is around 10 to 15% of the demand. Again, can vary depending on the product, the chosen market segment, if the product is hardware or software, the startup team’s capability, etc.
The revenue is calculated by multiplying the demand and the % conversion.
Example:
The below is an example of market size estimation for an AI/ML based solution that predicts likely failures in 50+ thermal assets in power plants.
- Value: The value the product offers to the chosen market segment (Power Plants) is that it can save about $1.5 to $3 Mn annually occurring from productivity losses due to thermal asset failure.
- Market Opportunity: The total number of power plants in India is about 400, and taking a conservative estimate of value offered at $1 Mn, the market opportunity is $1 Mn * 400 = $400 Mn.
- Demand: Taking a 20% adoption rate and the average price of the product being $25,000 per year, the demand would be $25,000 * 400 * 20% = $2 Mn
- Revenue: Assuming the startup will be able to convert 20% of the demand, the revenue gneration, say in the next 3 years, would be $2 Mn * 20% = $0.4 Mn.
Note that this is a rough estimation, and doesn’t include the recurring revenue from existing customers and revenue from other services offered if any.
This tool was developed by Vish Sahasranamam, CEO & Co-Founder of Forge. At Forge, through the Industrial Technology & Venture Acceleration Program, we enable industry-startup partnerships in strategic innovation and investment initiatives such as joint technology & product development, commercial partnerships, equity investments, and strategic acquisitions through Open Industrial Innovation. Learn more about Forge here.
