Sizing a market

As a Product Manager it is important to know how to size an existing market and arrive at a credible forecast for product demand.

You need to know how many clients will use your product or service -  a difficult yet critical question to answer. If you can’t put an estimate on product demand, then you cannot scale your delivery or support team or market or sales.

Existing product or services are simpler to deal with. There will be data -  a track record over the last twelve months. Clearly, data from the previous year is the most significant indicator and at the very least it gives a strong foundation to build from.

But what about new markets or new product? The starting point would be to look at the factors that drive adoption and use. These factors include:

  • People and markets
    Who will use the product or service? Is it a growing or shrinking market? Have you spoken to individuals who are good representatives of these people and markets?

  • Opportunities and problems
    What problem is it solving, or opportunities does it address? Is that problem/opportunity pervasive over the next twelve months? What evidence do you have of this?

  • Technology
    Are there technology changes that will impact demand? For example, new services or competitor products. Have you scanned the technology environment?

  • Regulation
    Does regulation drive adoption and use? If so, are there any regulatory changes that might change your market?

  • Lifecycle
    Where is the product in its lifecycle? Is adoption and use still growing month by month?

A real-life example of this is Spotify, the on-demand music app. This a well-known household name across the globe.

  • In 2016 they had 40 million paying users.

  • In 2017 they had 70 million paying users.

  • This is an increase in 30 million over 12 months at an average of 2.5 million per month.

  • The average subscription value is 4 Euros 59 per month.

  • And 90% of revenue comes from subscriptions.

Using the 5-step process mentioned earlier we can analyse the market in more detail:

  1. People and markets
    All ages and all nationalities use the product.  It’s a growth market and the product is in its growth phase.  Social media commentary supports the growth forecast.

  2. Opportunities and problems
    It’s based on a monthly subscription model, which offers a strong recurring revenue stream.  There’s an increasing expectation of “on-demand” and this now includes music.  It wouldn’t be possible to own the range of music that’s accessed by Spotify and so the subscription model fulfils the “music-on-demand” market requirement.

  3. Technology
    Supporting technology such as smartphones and speakers is improving constantly.

  4. Regulation
    This is not a heavily regulated market and so Spotify can be agile in its innovation and development.

  5. Lifecycle
    Spotify is still in a strong growth phase with limited competition.  Apple Music has less than half the number of subscribers.

From all the information you would be able to conclude that Spotify is likely to at least continue at its current growth rate and they can plan to take on a further 30 million new subscribers during 2018.  From historical trends, we know that approximately one third will join in the first half of the year and two thirds in the second half.

You would now have enough information to forecast 2018 usage and revenue on a month-by-month basis and you could plan to invest and resource accordingly.

The key points on sizing a market that you need to remember:

  • Forecasting is critical to right size your business.

  • For existing products, you forecast using historical data and adoption factors.

  • Using your historical data, you can make assumptions about future adoption rates.

This is one of the subjects we cover as part of the Complete Product Management course. To find out more and book your place visit the course dates page.