9-510-081

FEBRUARY 4, 2010

THOMAS STEENBURGH

JILL AVERY

Mark
keting Analys
A sis Toollkit:
Mark
ket Size
e and Market
M Share Analys
A sis

Introdu
uction
Markeeters frequently need to esttimate the size of their marrkets -- both for
f existing prroducts so thaat
sales foreccasts can be developed,
d an
nd for new prooducts so thaat market opportunities cann be assessed.
This toolk
kit enables you to size a maarket and gennerate a sales forecast usingg a market bu
uild-up
methodollogy. We beg gin by learning
g techniques for measuring market dem mand and com mpany deman nd
and learn how to calcu ulate market and
a product penetration
p raates and markket share.

We begin estimatinng our markett by identifyinng all of the potential

p buyeers in the market. We then n
segment these
t buyers into
i groups annd analyze th
he usage dynaamics of each h group. We look
l at existin
ng
buyers to understand their
t product replacement cycles to estimmate existing
g demand and d analyze new w
buyers to estimate poteential incremeental demandd. We use theese analyses to determine thet market
demand for
f our produ uct.

Measurring a Marrket
Markeeters use the teerm “market”” in many diffferent ways, which can bee confusing, so
o it is always
importantt to understan
nd how the teerm is being used
u before trrying to measure the markeet in question
n.

The poten ntial market is i the set of co

onsumers whho possess som
me interest in a product or to whom thee
product iss potentially relevant.
r Howwever, consumers in the potential
p mark ket may not be
b able to tran
nslate
their interrest into saless, given incom
me and markeet access consttraints. Or, ev
ven though thhe product is
potentially relevant to them, they may m be unawaare of its availlability due too poor marketting
communications.

The availaable market is

i the set of co ho have intereest in, income for, and market access to a
onsumers wh
particularr product.

The targett market is th pany decides to pursue witth marketing

he part of the available marrket the comp
activities.

__________________________
______________________________________________________________________________________________

Professor Tho
omas Steenburgh an
nd Professor Jill Av
very (Simmons Sch
hool of Managemen
nt) prepared this no
ote as the basis for class
c discussion.

Copyright © 2010
2 President and
d Fellows of Harvarrd College. To ordder copies or requeest permission to reeproduce materialss, call 1-800-545-76885, write
Harvard Busiiness School Publlishing, Boston, MAM 02163, or go to www.hbsp.harv vard.edu/educatorrs. This publicatio on may not be digitized,
d
photocopied, or otherwise repro
oduced, posted, or transmitted,
t withou
ut the permission of
o Harvard Businesss School.

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510-081 Marketing Analysis Toolkit: Market Size and Market Share Analysis

Estimating Market Demand

Market demand for a product is the total volume that would be bought by a particular customer
group, in a particular time period, in a particular marketing environment, under a particular marketing
program. Hence, the demand for a product in a market is heavily dependent on both the external
marketing conditions facing the firm as well as the firm's investment in marketing programs. When we
estimate market demand, we need to qualify our estimation as appropriate given a certain level of marketing
investment. For example, if we estimate that market demand for a product will be 1 million units, given a
marketing budget of $10 million, then our estimate of potential sales is only valid if we actually spend $10
million marketing the product. If the launch marketing budget is slashed to $5 million, our demand
estimate may be grossly optimistic. The market demand corresponding to a certain level of marketing
expenditures is called the market forecast.

If our product has substitutes that are offered by competitors, the market demand includes the
demand for all of the products in the category. If we have competition for our product, we may want to
estimate primary demand and secondary demand. Primary demand measures the total volume
demanded by customers for a product category (i.e. razors), while secondary demand measures the total
volume demanded by customers for a specific brand or product (i.e. Gillette razors). Hence, we estimate
the market demand and market forecast for the product given the marketing expenditures of all firms
participating in the market. Therefore, a market forecast is affected not just by our own spending, but by
the spending of our competitors as well.

When we estimate market demand, we assume that marketing expenditures will increase market
demand. However, we also recognize three constraints on this relationship:

1.) There is a certain level of demand for the product that would occur without any marketing
spending, which we call the market minimum,

2.) At some point, marketing expenditures become ineffective at generating incremental demand
because we have tapped out the market; this point is called the market potential,

3.) The market potential is dependent on a given external market environment.

Between the market minimum and the market potential, we have a range of demand levels that are
dependent on the level of marketing investment we put into the marketplace. Any of these demand
levels are predicted to be achievable if the corresponding level of expenditure is spent. The distance
between the market minimum and the market potential indicates whether our market demand is
sensitive or insensitive to marketing expenditures. A large distance between the market minimum and
the market potential indicates that demand is highly sensitive to marketing expenditures. A small
distance indicates that demand is less sensitive to marketing expenditures. This relationship is illustrated
graphically below:

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Marketing Analysis Toolkit: Market Size and Market Share Analysis 510-081

Market Demand as a Function of Marketing

Expenditures

Market Potential
Market Demand

Market Forecast

Market Minimum
Planned Marketing Expenditure Level

Category Marketing Expenditures

Source: Casewriters.

Market demand can be defined in units or in dollars. Market demand in dollars is calculated:

Market Demand in Dollars = Market Demand in units * Average retail price point in market

Note that when estimating market and product demand, we use retail prices, the price at which
consumers purchase the product (i.e. the retail price point). Hence, when we calculate market or product
demand in dollars, we are calculating the dollar value of the category or product at retail. Firms who do
not sell directly to consumers will not realize this full dollar value as revenue, as they will need to share
their sales revenue with their distribution channel partners.

Estimating Product Demand

Once we understand market demand and have a market forecast, we can then begin to analyze our
own firm's current performance and future opportunities in the market. Similar to market demand, we
can estimate our product demand (or secondary demand), which measures the total volume of our firm's
product which will be purchased by a particular customer group, in a particular time period, in a
particular marketing environment, under a particular marketing program. Our product demand will
depend on 1.) our level of marketing expenditures as compared to our competitors' spending levels, and
2.) the effectiveness and efficiency of our marketing expenditures versus our competitors. Our firm
should gain demand versus the competition when we outspend them and when the money we spend
works harder for us because it is put to use more effectively or efficiently.

Product demand can be defined in units or in dollars:

Product demand in dollars = Product demand in units * Average price point of firm

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510-081 Marketing Analysis Toolkit: Market Size and Market Share Analysis

Calculating Market Share

Market share analysis helps us understand how our firm is doing versus the competition. Unit Share
measures the percentage of the unit market demand that our firm has captured, while Dollar Share
measures the percentage of the dollar market demand that our firm has captured. Calculating market
share is like divvying up a pizza; you are calculating how big a slice your firm has versus the other firms
in the market.

Unit Share = Product demand in units OR Product unit sales

Market demand in units Market unit sales

Dollar Share = Product demand in dollars OR Product dollar sales

Market demand in dollars Market dollar sales

Companies that have the highest unit share in a market do not necessarily have the highest dollar
share in the market; for example, a low price competitor may sell a lot of units, driving its unit share
higher, but its low price versus its competition depresses its dollar share. Some companies pursue a unit
share objective, trying to sell the most units, while others pursue a dollar share objective, trying to receive
the most dollar revenue in the market.

Graphically, market share is usually depicted using a pie chart. Below are the unit shares and dollar
shares of competitors in the women's razor market. As you can see, Gillette has a 40% unit share and a
50% dollar share, while Bic has a 25% unit share and a 10% dollar share. What does this pattern indicate?
Gillette sells its units at a higher average price than Bic -- so Bic sells lots of units, generating a high unit
share, but doesn't reap the dollars, depressing its dollar share.

Unit Share Dollar Share

15% 5%
10%

40%
Gillette
Gillette
Schick
Schick
Bic 50%
25% Bic
Private Label
Private Label
30%

20%

Source: Casewriters.

Calculating Market Penetration

After we calculate market demand or product demand, we can calculate market penetration and
product penetration indices to see how much room there is to grow the primary and/or secondary
demand. The penetrated market is the set of consumers who are buying products in the category. The

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Marketing Analysis Toolkit: Market Size and Market Share Analysis 510-081

market penetration index measures the percentage of consumers in the potential market who are
currently purchasing a product in the category.

Market Penetration Index = Market demand

# of consumers in potential market

A low market penetration index indicates that we have room to grow the primary demand in the market
because many potential customers are not currently buying, while a high market penetration index
indicates that most of the market growth has already been realized.

The product (or brand) penetration index calculates the percentage of consumers in a particular
target market who are purchasing a particular product (or brand).

Product Penetration Index = Product demand

# of consumers in the target market

Low product penetration indices may an opportunity to grow the product or brand demand within the
target market, while high penetration indices may indicate strong performance in the target market and
limited opportunities for incremental growth.

How to Size a Market using Market Build-Up Methods

How many Chinese restaurants are there in Manhattan? How many light bulbs are sold in India each
year? How big is the market for MBA education worldwide? Questions like these sound almost
impossible to answer (without Google!) at first glance, but can be easily answered by decomposing the
problem into a series of smaller problems and then combining the results of those smaller problems
together to roll back up to answer the question.

Let's begin by realizing that we can build up to market demand by decomposing it into its composite
parts. Market demand is the product of the number of buyers purchasing, the amount of units they
purchase, and the average retail price they pay for a unit.

Market Demand = (# of buyers in the market) x

(annual quantity purchased by an average buyer) x
(the average price paid for a unit)

Let's size the market for women's razor blades in the United States as an example. The first challenge
we face is estimating the number of buyers in the market. Precisely specifying a target market allows us
to make a better estimate for this section of the problem. We could start with the population of the
United States (305 million people), but that would be too broad. We could narrow it by refining our
target market to include only women (51% of the total population or 156 million women). However,
given that not all women shave, we need to take out non-shavers (31 million female children age 0-14).
That leaves us with a target market of U.S. female shavers of 125 million people. Note that we could
continue to ratchet this number downwards by estimating the number of adult women who don't remove
hair or the number of adult women who use waxing or laser hair removal. The more finely we determine
our target market, the closer our estimate of potential buyers will be.

Then, we need to estimate the annual quantity purchased by an average buyer. Again, a precisely
specified target market helps us estimate here too. We can further break our 125 million target market of
U.S. female shavers into heavy, moderate, and light shaver segments. Let's say that 70% of women are

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510-081 Marketing Analysis Toolkit: Market Size and Market Share Analysis

moderate shavers, shaving once a week, 15% are heavy shavers shaving every day, and 15% are light
shavers, shaving twice per month. From experience, we know that heavy shavers buy 12, moderate
shavers buy 7, and light shavers buy 3 razor blades per year.

So we have:

18.75 million heavy shavers * 12 = 225.0 million razor blades

87.5 million moderate shavers * 7 = 612.5 million razor blades

18.75 million light shavers * 3 = 56.3 million razor blades

Total 893.8 million razor blades

So, we have sized our U.S. female razor market at 893.8 million razor blades.

In order to estimate the dollar value of the razor blade market, we need to know how much each type
of shaver pays for her razors. Suppose that heavy shavers pay the most ($8.99) because they buy the best
technology, light shavers pay slightly less ($7.99), and moderate shavers pay the least ($5.99) because they
always buy what is on sale.

225.0 million blades * $8.99 = $2,023 million

612.5 million blades * $5.99 = $3,669 million

56.3 million blades * $7.99 = $ 449 million

Total $6,141 million

Hence, we have estimated that the U.S. women's razor blade market is a $6.1 billion market. Notice
how conducting this analysis also gives us insight into how to market to different target markets. For
example, we know that although the heavy shaver target market is just 15% of the total number of
shavers, it accounts for 33% of the razor dollar sales.

Now that we have a rough estimate of the market size, we can further refine it by asking ourselves the
following questions. These will help us test some of the assumptions we have had to make along the
way:

• Do women have lots of razor blades already in their medicine cabinets that will depress sales this
year?

• Are bare legs more or less likely to be in fashion this year?

• Are girls starting to shave earlier than the age of 14?

• Is the adult female population growing faster or slower in the coming year?

• Are new buyers coming in likely to fall into the same usage patterns as existing women?

Remember, that a market size analysis usually requires you to make various assumptions. Use the
attached Excel model to test the sensitivity of your estimate to your assumptions. Watch what happens if
you change the size of your potential market or if your target markets use 1 less unit per year.

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Marketing Analysis Toolkit: Market Size and Market Share Analysis 510-081

We have just calculated the market demand for razor blades. The next step a manager would take
would be to calculate her product's (or brand's) demand. This would require making assumptions about
what portion of the market demand the product (or brand) would be able to capture versus competitive
products.

Using Market Size and Market Share Analysis in Marketing Decision Making
Managers generally have their market size and market share estimates at their fingertips at all times.
Why? Because these two calculations inform a host of marketing decisions, from which markets to enter,
how to assess the competitiveness of your firm's products and/or brands versus the competition, to
tracking success in the marketplace. Correctly estimating market size and market share is essential to
developing an accurate sales forecast, which drives manufacturing and marketing decisions. Managers
often track market share development over time to see how they are performing versus the competition.
Managers also track market penetration over time to see if they are successfully converting prospects
into customers.

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