Decoding Market Sizing Methodologies

Show Notes:

James Agres is the founder of  2nd St Strategy, an independent consulting firm focused on private equity and commercial due diligence work. He has experience in various industries, including software, industrial, and healthcare. James discusses the importance of market sizing in commercial diligence projects.

In this episode, he talks about the importance of market sizing varies project to project, and how it helps businesses understand the size of opportunities available to them. A large market can represent a large opportunity, while a small opportunity may be more limited. James explains that understanding the market's competitive dynamics, market share, and growth drivers is crucial for businesses.

James shares the different terms for market size, such as total addressable market (TAM), serviceable addressable market (SAM), and serviceable obtainable market (SOM). The total addressable market is the total population of the town, the number of haircuts, and the price of the haircut. The serviceable addressable market is the percentage of the town represented by men in a certain income demographic or willing to spend a lot on haircuts, and the serviceable obtainable market is the percentage of the town represented by men in a certain income demographic or willing to spend a lot on haircuts.

Determining Market Size

James explains that to reach the desired audience, businesses must advertise to the entire town or reach specific demographics and geography within the town. He talks about various market sizing approaches, including price times quantity and quantity times price, by segment. He explains that the most basic market sizing framework is price times quantity, which can be applied to dental practice management software. The market size is about half a billion, with 138,000 stores in the US and a close-to-100% adoption rate.

He offers another example of software used to manage reservations at state, national, and local parks in the US and Canada. The market size can be estimated using various methodologies, such as the p times q methodology, which uses data on visitor numbers, pricing, and vendor percentages. The state parks and target organizations can also be used to determine their market share and percentage charges. James presents various market sizing approaches, including price times quantity and quantity times price, to analyze the market size of various industries. By utilizing these methods, he aims to provide a comprehensive understanding of the market size and competitive landscape in the dental practice management software market. 

Estimating a Company’s Market Share

The second method involves estimating a target company's market share based on their revenue. This method assumes that all competitors operate similarly to the target company. This method can be applied to the rest of the market, as well as to the target company's market share.

The third method involves estimating the adoption rate of a product or service. For example, the market for waffle service is a complex one, with 680,000 restaurants in the US and a significant number of hotels and restaurants. To estimate the percentage of restaurants serving waffles, various methods are used, such as industry interviews, menu data, and analysis of menus. The adoption rate of about 10% is crucial for market size sizing, as it is often the hardest variable to determine when considering price and quantity.

James advises that, In the context of due diligence, it is essential to gather data and make critical assumptions to determine the pricing of a target. This can be achieved through various methods, such as talking to customers, analyzing restaurant and hotel data, and contacting competitors or market participants.

Where to Get Good Quality Data

In industries where the quantity is not well-known, such as the number of dentists, it is possible to get the quantity side of the equation by using good quality data. This can be obtained from sources like the Bureau of Labor Statistics. However, when the quantity is not available, different methodologies can be used, and James shares the various methodologies and software that can be used. James also explains the importance of understanding market size in nascent or new markets, and growth markets,  such as the market for vocal biomarker software. This technology is used to detect behavioral health conditions and cardiovascular diseases, such as respiratory distress during the COVID-19 pandemic. He talks about the need to understand the actual use cases for technology, the different routes to market, and potential users of the technology. 

Pricing Strategies and Technology Usage in Market Sizing

James talks about the importance of asking questions about pricing, such as competitors' pricing strategies or other clever ways to get people comfortable responding. Overall, he emphasizes the importance of understanding market size and the need for a well-rounded approach to understanding and addressing market trends and opportunities.

When using technology, James suggests that the first question should be "What AI tools for what use case?" This helps build a foundational number from which to apply different criteria to build a market size further. He also discusses the possibility of triangulating the market size using different approaches and methodologies, such as using the same set of assumptions for each methodology. He also discusses the importance of understanding the difference between different methodologies and the need for additional data to remediate any errors. He states that multiple methodologies for the same market should aim to produce the same result, and that the question should be asked about the right data to help determine the appropriate pricing strategy.

James emphasizes the importance of understanding the pricing in a particular industry, particularly in the cybersecurity solutions market. Some industries may be relatively transparent, while others are more picky and pricing is difficult to obtain. To size the market, Agres suggests using publicly available information, such as online forums and system administrators' subreddits.

Cybersecurity Solutions and Determining Market Size

James shares that collecting market size data can be challenging in some industries and cites cybersecurity solutions as being a difficult one to gather data on as  the exact size of the market is not as relevant as the market size. Instead, he suggests using Gartner data to understand the specific segments where the solution is most applicable. James suggests that to get to a more precise definition of the market, and figure out exactly which segment the target is relevant to is extremely important. He also discusses the challenges of predicting market size in industries like building products and construction. He suggests using data from various sources, such as EIA data, to build a model that accurately represents the market size. Additionally, there is the need for a more precise definition of the market and determining which segment the target is relevant to and he shares a few unusual examples such as the market size for fire doors and the market size for waffles.

Timestamps:

01:32 The different types of market size

07:03 How to estimate the size of the market

11:54 Example case studies to understand market size

17:57 Example of a market for next generation 911 software

22:37 Measuring the market size of the deep foundation

25:17 The market for fire and security alarms

30:54 How do you determine market size for AI? 

35:36 Favorite questions to ask around pricing

40:13 Providing multiple layers of market size to private equity

Links:

Website: https://www.2ndststrategy.com/

CONTACT INFO:

https://www.linkedin.com/in/jamesagres/

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