Deep-dive: A (better) way to size a market


Prior to the Entrepreneurship class with Professor Newman, I found myself guilty (among with many others I’ve met) of taking shortcuts when it comes to Market Sizing. What I used to do is pull up a resource (like IBISWorld), or Google for an infographic that looks like the one above, and once I get the number on the revenue of the industry then I found my market size. Plain and simple.

If you don’t have anything else, having this means you’re already ahead of the pack. But why then would we need a better way?  Here are three reasons why:

  1. The number in the infographic represents what has historically been made, not the potential of what can be earned in the future.
  2. More often we also find projected growth rates, but still this information does not give us insights on whether the market is over or under-served.
  3. The revenue of the existing players does not necessarily imply there’s room for new entrants to take a piece of that pie.

So if this information doesn’t cut it, what else should we do?

Note: For this exercise, I decided to size up the market for the restaurant industry in British Columbia, Canada.

First, we look for information on the annual average household spending on restaurants. This kind of information (depending on the country) shouldn’t be too hard to find. Here’s a link to the file for BC.

After you open it, you should be able to find what we’re looking for:


Ok, so now we have information for 2010 up to 2014. But as it is 2016 now, we can start our business in 2017. VCs/Angels typically ask you for three years of monthly financials, which means we need to size up our market all the way to 2019. How do we do that? We project the data by doing a horizontal analysis on the total expenditure, and a vertical analysis on the food from restaurants:


Next, now that we know how much on average a single household spends on restaurant food, we then need to start looking at population statistics–how many people are there, and how many individuals comprise a household? Once again, the statistics should not be too difficult to find for Canada (Population statistics: link, Number of Households: link).

Crunching the numbers would yield:


But wait… the infographic said they were able to generate $12-billion in revenues for 2015 when on average our population can only spend roughly $5.0-billion that same year. What could be causing this disconnect? I can think of two reasons:

  1. Our spending data might be skewed, in which case we should use the Median instead of the average.
  2. There are more inputs to the revenue than just the spending of the local population.

Given that we have data for each quantile in the spending survey, we can easily validate the first reason. Redoing the calculations for expenditure growth with medians would yield an average growth of 0.93% (a huge drop from the previous 1.42% year-on-year), and an allocation of 3.65% (over the previous 3.20%). While the allocation is high, the growth rate is low, thus projecting this forward would actually lead to a smaller market size. This doesn’t really help us bring the number closer to the reported $12-billion, so maybe we can leave the rest as a numbers exercise.

Let’s work on the second reason. A quick Google will show that BC had its fair share of Tourist Arrivals (link). While there are different classifications of tourists as you’d see when you open each of those files, I decided to use ONLY the tourist data for US and International Overnight. Why? Because I’m sure those people will be spending their money in BC, as opposed to those tourists who used BC only as their port of entry into Canada.

I know that I’m supposed to show you the due diligence of the numbers work as this is a deep dive, but I thought this post is getting way too long. The tourist information only has numbers for 2015 back to 2012, so I projected the numbers forward. Long story short, our market size calculations would eventually look like this:


You would see that for 2015, the size of the market was actually $13.8-billion, in contrast to the reported sales of $12-billion. This only shows that the market is currently under-served by the restaurant industry (which makes this an attractive market), and that there is room for new entrants to enter the market.

Disclaimer: Just because the numbers say it’s attractive doesn’t guarantee success for the new entrants. There are more factors needed to be considered other than just the market potential.

Finally, I’d like to end this post by presenting a bullet chart–an easy way to visualize the numbers we just crunched:





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