8 B2B Market Sizing Approaches to Quickly Assess Market Opportunity
December 10, 2013
Analyst Spend Statistics Approach to B2B Market Sizing
This is a top-down approach (see my previous post for an explanation of top-down vs. bottoms-up market sizing) that can help you identify company size cut-off lines for target market definition, which can be applied to industry data to get a market estimate. This approach can only be used in analyst-tracked markets.
When is it Useful?
Often, cut-off lines for company size in a target market are arbitrarily assigned. This can be problematic because you don’t want to be trying to sell your product/services to customers who cannot afford it. There is nothing worse than getting to the end of the sales process with a customer to find out that they could never afford your product/services.
In this quick guide, I outline how to use analyst spend statistics by vertical to identify company size cut-off lines for target market definition, so you can avoid this problem.
The first place you typically want to turn to estimate minimum target customer sizes is your customer data. Unfortunately, this data is often way too sparse to get a good read on this, especially when you are looking at new segments to target that your company has little experience selling to.
This same issue also impacts you when you are trying to estimate a company’s overall market size.
Who publishes spend statistics, and how can you find this information?
Analyst firms track and report spend statistics for each function in business and many technology types by industry. Typically, you can find these statistics without paying for publications. At the very least, you can find statistics that are a year old, which typically do not change too much from year to year.
Below are some examples of spend statistics that are reported by the major tech analyst firms:
- Gartner and IDC both publish IT spend statistic reports for all major technology areas that can easily be found online, as well as overall IT spend statistics:
- Example of Gartner overall spend statistics for 2012
- Example of Forrester DR/BC IT Spend Allocation Report
How can you use analyst spend statistics to identify company size cut-off line?
This information can now be used to back-out what the minimum annual revenue the average company would need to consider purchasing a product/service at its current price.
Use the following formula to figure this out:
- Minimum Revenue = Average Sales Price (ASP) / (% Revenue Spent on IT * % Allocation of IT Budget Towards technology Area * % Take of Technology Allocation )
Example of Analyst Spend Statistics Market Sizing in Action
- Question: What is minimum-sized utility that your company could expect to successfully sell services to if it charges $1,008 per a month on average for DR services? And what is its total potential market opportunity?
- Minimum Revenue Calculation: ($1,008*12)/(.062*.013*1.00) = $15,000,000
- How many utilities generate less than $15 million in revenue per year in the United States?
- Looks like there are a couple of good sources to make an estimate: LinkedIn, US Energy information Administration
- Need to convert revenue into an employee count to use LinkedIn. This can be done using an industry revenue to employee multiplier.
- We can estimate total market opportunity without ASP since we have a canonical revenue list.
- Total Market Opportunity = ∑(Revenue* (% Revenue Spent on IT * % Allocation of IT Budget Towards DR/BC) = $248,000,880
- What is our expected take of this market?
- Let’s use our current overall win rate of 25%.
- So total market opportunity = (25% * $248,000,880) = $62,220,000
Note: Prior to kicking-off any market opportunity assessment, I recommend thinking about the potential benefits of this analysis relative to the time commitment and evaluating alternative analysis approaches. Younger companies are always resource constrained, so it is important to wisely invest your time.
Click here for the following how-to guides and stay tuned as more become available: