Follow a 4-step process to accurately size the market for new technology products and services.
“How did the product manager get leadership interested in that new product idea?”
“He showed them a billion-dollar total addressable market!”
Product managers use eye-catching market-sizing estimates of the total addressable market to gain executive interest and approval of their new product or service ideas. Although this approach can garner attention, it is just as likely to overlook key factors and overestimate realistic opportunities.
There’s a better way to size a market for technology products and services.
A structured approach that narrows down market opportunities from broad estimates to more targeted, segment-based opportunities empowers product managers to improve market-sizing estimates in product planning.
“Technology product managers must employ robust frameworks to quantify potential market demand and defend key business plan elements and assumptions,” says Emil Berthelsen, Senior Director Analyst, Gartner.
Use a four-step approach to craft thorough and grounded estimates of market opportunities and justify the assumptions in your estimates.
Step 1: Combine top-down and bottom-up research
To build more focused and defensible total market opportunity estimates, combine aggregate competitor sales data and industry forecasts along with more specific, “bottom-up” data reflecting the customer base dynamics of the product or service. This approach enables product managers to create more defensible estimates that address the company’s specific customer definitions within the context of the broader addressable market.
Step 2: Shift focus from sizing the global market to defining the addressable market
Total available market is a segment or class of prospective buyers you have chosen to pursue first because of some unique positive characteristics shared by the members. Honestly assess and accept the strengths and limitations of your company’s operations to refine a total market opportunity estimate into a total available market calculation.
Define and calculate the number of potential customers or users within the immediate sphere of your business’s influence by applying important gating factors such as the company’s segment focus, customer attributes and operational capabilities.
Step 3: Refine available market estimate into total serviceable markets
It is nice to know that the total available market is potentially large and the total serviceable market is attractive. However, your business leaders and partners need to know what results they can achieve in the current phase of the market.
To arrive at your company’s total serviceable market estimate, gauge how many customers are expected to buy either as early adopters or as more mainstream adopters in your targeted market. Outline factors such as how long it will take for the business benefits of the emerging technology to be accepted among targeted buyers.
The market segment opportunity should represent what your company can realistically expect to achieve in the target market
Quantifying the total serviceable market highlights to business leaders and your partners their potential level of agency in moving the market to adopt new approaches. Product managers can show how their involvement, investment and resources make a difference in growing revenue over the emerging technology’s life cycle.
Step 4: Focus on actual financial impacts
The market segment opportunity should represent what your company can realistically expect to achieve in the target market. The opportunity must account for critical implementation factors such as the existing combination of proposed product or service, operational efficiency and scale, and marketing and sales channels, as well as distribution structure.
Utilize survey and conjoint discrete choice techniques to identify the best balance of brand, features, pricing and other factors that can lead to a company deciding to switch vendors. Explore nuanced and detailed insights of the business model for the product or service being analyzed, including brand strength, switching behavior and price sensitivity trends.
With an honest and transparent internal assessment, product managers can derive a market segment opportunity calculation that sets realistic expectations of likely business opportunity. Only then is the executive buy-in durable enough to bring the product or services to market with long-term profitability.
Gartner clients can read more in Four Steps for Calculating Potential Market Share Size for a New Product or Service by Emil Berthelsen.
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