Why Large Markets Can Sometimes Feel Very Small (and why Addressable Market is insufficient)

We’ve written before about the need to clearly define markets to inform accurate sizing. But even with the clearest possible definition, one other piece of analysis is critical, and is often overlooked – quantifying what we like to call the Available Market Size.

Different from the total or addressable market size, we define the Available Market Size as being the proportion of annual demand that is “competed” in any one year. This is determined by two key factors:

While understanding total market size is useful as an indicator of the total “headroom” available for growth, determining the Available Market Size is a much stronger indicator for the likely growth rate of a business. After all, the growth rate for a company is simply a function of the Available Market Size, and the share of that available market that a company can capture (which may be higher or lower than its overall market share).

Too often, a large total market size is perceived to be a good proxy for a large growth opportunity – but all too often it is not. Two diligence risks exist:

1. Correctly identifying a large addressable market, but underestimating the work that is required to overcome inertia and promote customer switching; and

2. Identifying a target which does a very good job of servicing and retaining current customers, but which lacks the proposition or capabilities needed to win new business

Fully understanding the Available Market Size requires a solid mixture of quantitative and qualitative analysis – to assess the fundamental demand drivers (number of qualified customers; average purchase values; etc.) and specific customer behaviors (such as their perceptions of switching drivers and barriers). This analysis requires care within complex value chains. For example, for B2B2C companies - consumers’ willingness to switch brands might be very high, but if retailers or wholesalers are unwilling to switch suppliers or list new products, then that will ultimately be the limiting factor in determining the Available Market Size.

Armed with a solid understanding of the Available Market Size, acquirers can define a clear, growth-oriented value creation strategy for a target company.

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