Understanding a sector’s growth potential is critical to making important business decisions for entrepreneurs, executives, consultants, investment analysts and researchers. Market projections enable stakeholders to make critical investment decisions, starting from whether a company ought to enter or expand operation into a particular market, to finding possible inflection points, which would impede or accelerate future growth.

Considering the paramount importance for gauging sector growth trajectory, it’s imperative to adopt a data driven approach for fostering objective decision making. Although making projections are easier said than done, adopting a structured approach towards identifying sector growth drivers, can simplify the market projection process to a large extent.

We usually adopt a top-down approach for structuring the market growth model. Firstly, we need to identify the macro-economic and demographic factors like population growth, per capita income growth, income distribution, propensity to spend with rising income etc. Secondly, we need to understand the industry wide demand drivers e.g. interest rates, oil prices and regulatory changes etc. Lastly, we need to identify some company specific factors which can have a diametric impact on the industry. The whole process of market projections can be broken down into five key stages.

Macro Drivers

Macro indicators like population growth projections and income growth trend can easily be gleaned from credible sources like World Bank, IMF etc. Other important factors include exchange rate trend, changes in monetary policy and shift in trade regime. Change in government policy towards a sector can positively or negatively impact a sector.  The subsequent step would be to understand how all these factors will drive demand and impact supply for a particular sector. For example, growing per capita income will increase protein consumption, contributing to higher demand for broiler chicken meat. Bangladesh formally graduating as a middle income country may result in rescinding of different trade benefits e.g. GSP, for apparel and other exportable items, resulting in declining growth trend for those sectors.

The main decision point would be to build a causal relationship between these factors and demand trend. For example, to what extent will rising income impact demand for a certain product? We need to understand whether demand for the product is demand elastic or inelastic in nature.

Consumption Trend

We tend to break down population into different income classes- Bottom of the Pyramid, Aspirant, Lower middle, Upper Middle and Affluent classes- who have differing consumption patterns. Consumers from different incomes classes have different propensity to spend for different products. Consumption spending for each income class needs to be estimated using findings from both primary survey and secondary research. The idea would be to estimate basket sizing (spending on a particular product per household for each income class per annum) and corresponding demand. Alongside, propensity to buy in next one year is another important criteria for estimating total demand. For example, while analyzing the Air Conditioner market, it is known that bulk of the demand should come from the higher middle and affluent class in the residential segment. The primary survey should include representative samples from all income classes, which would enable us to estimate the household’s ability and willingness to spend. Benchmark data on willingness and ability to pay for each income class will need to be collated from survey findings, validated through interviews and plugged in the market projection model.

Industry Drivers

Some industries have external factors which can possibly impact demand. It’s important to brainstorm and research potential drivers which can influence and impact future growth. For example, gauging demand for Liquefied Petroleum Gas (LPG) involves understanding demand for raw materials and substitutes. Since LPG is essentially a byproduct of crude oil processing, rising international oil prices are directly correlated to import prices for LPG. Uptick in oil prices may prove to be a dampener for LPG demand in the future, since LPG prices will go up across the board. Another example would be the demand projections for consumer durable e.g. refrigerators and televisions. Since consumer durable usage requires electricity, country’s electrification rate directly impacts prospective demand growth for consumer durable, particularly in the rural areas. Growth in electrification rate will positively impact demand for consumer durable.

Making Leap of Faith Assumptions

 While building a market growth model, we tend to assume a number of things, which would reduce the complexity of the projections. For example, which conducting demand projections for broiler chicken, the per capita meat consumption and feed conversion ratio (No of KGs of feed required for each KG of chicken meat) can be kept constant over the projection years for avoiding complexity. We also need to assume that no disruptive technology would adversely impact the industry’s growth. For example, back in 2008, anyone projecting the growth of taxi industry, may not have predicted the disruptive power of ride-sharing behemoths like Uber, Ola and Lyft.

Validation is the Key

While a market projection model can generate market sizing and growth projections, validation is very important. This is where interviews with different market players and industry experts are key to arriving at a more realistic projection range. The process of arriving at an acceptable market growth projections is known as information triangulation, which involves collating information from secondary sources, surveys and sector expert interviews. While no one can claim to perfectly predict the sector growth prospects, the idea is to make realistic estimates which would be at most 8-10% within actual market size.

To note, building market growth models require sifting through significant volume of sector specific published materials and discussions with sector experts, for building deep understanding of the sector dynamics and for identifying demand-supply drivers.

 

Now What?

Once the market model is finalized, further scenario based analysis can be conducted by delving deep into the indicators possibly influencing the expected growth. We normally tend to arrive at three scenarios- Best case, likely and worst case/conservative scenario. This would enable the entrepreneurs or analyst to understand the inherent risk factors which can impede future growth prospects. Alongside, investors also need to make necessary plans for best case scenarios, when demand for their products can possibly exceed supply.

The market model can help analyst to build a financial model, with realistic estimates of the expected market share to be targeted by the players. Alongside, researchers and consultants can design strategies for their clients, based on their estimated market projections.

6 Comments

  1. Avatar Mohasin Kabir August 27, 2018 at 3:21 am

    Good and necessary read. I am sharing with my team mates. Thanks.

    Reply
    1. Zahedul Amin Zahedul Amin September 6, 2018 at 10:06 am

      Thank you for appreciating the write-up, Mohasin bhai.

      Reply
  2. Avatar Habib March 21, 2019 at 5:26 pm

    Very insightful one Zahed Bhai. Will be immensely useful. Keep writing please

    Reply
    1. Zahedul Amin Zahedul Amin March 24, 2019 at 4:37 pm

      Thank you Habib bhai!

      Reply
  3. Avatar Shreekumar March 21, 2019 at 9:55 pm

    Zahedul, overall a good approach but it appears that your approach is more suitable for consumer goods sector.

    I would like to approach a bit differently. First bucket I would call is Externalities. This is similar to your Macro bucket but a bit more than that. This aspect should include things that are not industry specific. The key elements are related macro, technology, policy and overall societal trends. Main things to consider are demographic trends, policy aspects, technology development, currency, inflation, disposable income, savings propensity etc.

    Second bucket should be End customers or consumers. Then, as you said key is to segment the market and then understand the consumption drivers for each segment. Key things to look into consumption intensity, elasticity of demand if we are dealing with B2C type of sector. If B2B then depending the nature of the sectors business services, capital goods, commodities you need to look into different factors. For example, if it is cement then you need to look into growth of residential and non residential construction which are heavily linked to fixed assets investments. Substitution and complements are important factors too. For example, in the west steel is replacing cement so that impacts demand.

    Third, conduct of the suppliers especially in the consumer goods sector. Suppliers can stimulate demand and increase market penetration by pricing, advertising abnd awareness building.

    Reply
    1. Zahedul Amin Zahedul Amin March 24, 2019 at 4:36 pm

      Thank you for the detailed feedback Sreekumar bhai. The idea of segmenting market in B2B and B2C segments sounds interesting.

      Reply

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