Market sizing in B2B markets: relevance and challenges
Markets come in all sorts of shapes and different dimensions to segment, and there are many variables to take into account to successfully operate within a market. One important aspect you should be aware of, in any market you want to operate in, is market size. The market size can be either expressed in value: the total value of all sales, or volume: the total number of products sold. In this article, we are diving into the uses and challenges of market size, especially for B2B markets. In B2B markets we are not looking at the end consumer products everyone is familiar with, but at ingredients or raw materials, processed to be used later as part of those end products. In the next paragraph, I will explain why the market size is an important piece of market intelligence.
Why is market size relevant?
Being aware of your market size can have several uses for an organization. First of all, you can estimate your market share by comparing your sales data to the market size. One step further, market size can be used to assess sales performance. The more accurately you are able to estimate market size and label your sales data for market segments, the better you can assess where your sales are doing well and where there is room to improve. Speaking of room to improve, being aware of market size will also help you to estimate growth potential. You can see your market as a pie you and your competitors all want to eat from. The larger the market size, the larger the pie. It is up to you to ensure get the biggest possible piece of it. In order to find out which part of the pie you should try to eat, it is once again useful to estimate market size as accurately as possible for different market segments.
Any segment with a large gap between your current sales and total size could be worth putting more effort into. Try to find a segment where this is the case, and where you are able to gain a competitive edge over your competitors and you may end up eating a bigger part of the pie! An analysis like this will help you decide how to allocate your resources and competences, and it may also reveal opportunities that are worth developing new competences for.
Even though market sizing has many uses, it is not always easy to estimate market size. Next, I will describe the main challenges that come along with estimating market size, especially in B2B markets.
What are the main challenges in B2B market sizing?
The first challenge is defining your market. This may seem simple, but it is not always easy to narrow down exactly which geographical regions and which product categories are included and excluded in your market.
The second challenge is the low data availability regarding B2B products. There are many sources that keep track of consumer data, however, it is rare to come across a reliable source with data on B2B markets.
This immediately takes us to the third challenge:calculating the market size based on business rules. Often one will encounter that there is only data available about market value, rather than volume. By segmenting the market into regions and product categories, accounting for the prices of the different product market combinations, and accumulating the data for all the segments, one can estimate market volume. Another challenge within this exercise is estimating the proportions of different market segments within a total market. As market value data is often only available for B2C markets, estimating the market volume for B2B markets often requires an extra step. This step requires business rules to calculate the B2B market based on how the B2B product relates to the B2C products they are part of.
The final, and probably the most difficult challenge is to find out that reality differs from your expectations. It is great to come to a confident estimate of the market size after facing all these challenges. Now imagine that you compare your sales data with the outcome and it seems that you have a much different actual market share than you thought you had. Or finding out that you are missing opportunities in certain segments. This has led (and will lead) to many strong discussions between market analysts, product/marketing managers and sales teams. These discussions may be challenging, but they are invaluable to a company.
What is the most important advice regarding market sizing efforts?
Act on it! Very often market analysts do great work in order to estimate a market size as accurately as possible. However, the outcome may imply that a sales team is underperforming, a strategy should be altered, or opportunities are being missed. This might not be the desired outcome, but if it is the truth a company is better of going in a different direction, one should not overlook the next steps. Basing decision making on data-driven insights will always lead to better decisions than basing decision making on gut feeling or existing routines!