In the more than 30 years this agency has existed, we’ve never had a client come to us and reveal that they had unlimited time and unlimited funds to apply to their growth challenges. When developing a strategic roadmap, each and every one had to weigh the opportunities and opportunity costs of every decision and prioritize those efforts and investments that will yield the greatest net returns to the business.
As one undergoes the strategic planning process, understanding what potential opportunity may result from any strategic priority will undoubtedly require a mix of assumption and intuition, and, more importantly, basic quantitative analysis. In this post, we wanted to outline a couple of basic but powerful formulas and processes to assist in some of the most common areas of inquiry: market sizing and budget prioritization. In other words, “how big is the opportunity, overall?” and, “How should budget dollars be allocated to ensure maximum average returns?”
Part 1—How to calculate potential market size.
Estimating the size of any new market is a mixture of art (the assumptions are you are making) and science (the hard evidence you have to quantify the validity of each assumption). Now, there are plenty of folks willing to stake their reputations and their businesses on a purely art-based approach—you could say relying on emotional confidence versus statistical confidence—but the following formulas deliver far more reliable results if you backup your input variables with actual research data. So, what are the variables that go into your formula?
Total population (P): This simply corresponds to the total population in your trading area. That could be local, regional, national or global.
N = Total Geographical Population
Percentage of Target Customers (PTC): The percentage of the total population that fits the target segments most likely to be an active customer.
Average Transaction Quantity (Q): The average quantity purchased by a single user at a time.
Frequency of purchase (F): How many times the product or service is purchased in the most relevant period of time (annually/quarterly, etc.).
Price of Product (P): What the expected revenue generated is per transaction.
Market Size (MS) Formula = (get ready, this is the math part) MS = P * PTC * F * P
An example: Since the advent of bike share programs around the country, articles keep popping up about the need for single-use or limited-use helmets. So, let’s say you’ve just invented a new recyclable engineered paper bicycle helmet for bike share usage. And you want to launch it in a test market, like Chicago. In 2017, Divvy claimed more than 37,000 members, so in this example, we can use that for P.
But all 37,000 will not be in the market for our new helmet. How many will be? This is where it would behoove you do some actual quantitative research (the science) among Divvy members to determine levels of need and interest. Let’s say we conducted a quantitative online survey with a representative sample (300) Divvy members that indicated 50% of them already own their own traditional bike helmets. Of the remaining 50%, half again of those will never wear a helmet. So, we are left with 25% of the original population that do not own a helmet and are not opposed to it. But only half of those (the remaining 12.5%) said they would be interested in purchasing your helmet. So, in the end:
PTC=.125 (or 12.5%)
Each consumer would generally only purchase one helmet at a time, so:
But the helmets only last about 4 weeks before the paper breaks down and most Divvy members only bike 3.5 months out of the year. Discounting for the fact that most people will not be diligent about replacing the helmets in a timely fashion, let’s put the frequency of purchase at 2.5 per year.
And, finally, you’ve designed the helmet to sell for about $10, so:
So, let’s plug those into the formula!
MS = P * PTC * F * P
Market size (MS) = 37,000 * .125 * 1 * 2.5 * 10
After going through those calculations, you realize there’s a reason the idea of single-use helmets comes up every year, yet no one is developing single-use helmets.
Part 2— How to prioritize marketing budgets for growth.
Every marketer faces similar challenges when it comes to budget prioritization. It always comes down to determining against which products or services do you spend what portion of the budget. And always, the calculus centers on ultimately realizing the greatest returns for every dollar spent. Surprisingly, even though this is an ongoing concern, many marketers rely more on gut intuition than quantitative reasoning.
To add a little more quantitative reasoning into the mix, we’ll introduce you to another simple calculation (courtesy of McKinsey & Co), called the customer growth index (CGI). It’s an interesting way to understand the correlation between initial consideration and growth potential.
Simply put, to arrive at the CGI, you take the percent of time your brand is a member of your customers’ initial consideration set, then divide that by that your brand’s current market share, and finally, multiply that result by 100 to create an index. The closer to 100, the greater the brand’s ability to keep up with the pace of growth in the market as a whole.
CGI= %consideration * %marketshare * 100
McKinsey uses this for looking at overall brand, but we think it can be a useful tool if you know that same inputs with in each of your product categories. Let’s say Nike was evaluating marketing budget allocations for shoes, apparel and tech wearables. By calculating the Nike CGI for each product category, they would have a better indication of the brand health in each, and which are more or less likely to experience growth for each marketing dollar applied. It’s not the end all determination of which categories should get what budgets, but it’s a strong signal of momentum that should be taken into consideration.
Lasting success is calculated.
Marketing is always a blend of art and science. No matter what the size the market opportunity or propensity for growth, we all need to deliver memorable, motivational experiences for our customers. In the end, these formulas can help simply provide an additional objective sense of perspective in the planning process.