Market growth rates are a key indicator of the health of your company. Going back to our aircraft pilot analogy, market growth rates can be likened to a tail wind. The tail wind can create a large difference between ground speed and air speed. If the pilot were to use air speed alone he would miss his destination. Assume your revenues are growing at 15 percent per year. On the surface, this appears impressive. If, however, market revenues are expanding at an average of 25 percent per annum, you have a serious problem. Relative to the "speed" of the overall market, you are foundering. Obviously, you are missing out on the benefit of some "tail wind" that your competitors are enjoying.
The market growth rate concept is simple enough on the surface. However, it is extremely important to remain aware of the specifics underlying the measurement. Some typical market parameters are described below.
- What are your product groups?
- What is your time period?
- What are your geographic areas?
- What are your measurement units?
- Production values: Units, Currency
- What are your customer segments?
- Do you intend to adjust for inflation?
Methods of Measurement
The measurement of market growth is quite simple if you are dealing with a market that you have been tracking regularly over a period of years. This is rarely the case. The great majority of companies have not (to date) been taking regular measurements of market size, so calculation becomes more difficult.
There are many ways to calculate the growth of a market or product segment. The use of secondary sources is the easiest and least expensive way to get an estimate of market growth rates. Many market engineering companies publish information of this nature (more than 125 at our last count).
You are likely to encounter two problems with published information. First, unless you are a participant in a multi-billion dollar industry such as portable computer manufacturing, the chances are the empirical information you need to quantify your market does not exist. Nine out of ten times, it has been our experience that accurate statistics for specific product segments do not exist.
Second, the overwhelming majority of information referencing the size of various markets and growth rates is poorly documented and inaccurate. The data gleaned from magazines, newspapers, or government sources should not be used unless you can verify the methodology used in gathering the information. Magazines and newspapers will often quote sources without taking the time to verify the information being supplied to them.
As for government statistics, each time we have tried to use government data (such as Commerce Department statistics) during a research project, we end up embarrassed or disappointed with the results. During our investigations into one particular market, we went to the Department of Commerce to try to find some accurate numbers on which to base growth projections. We were shocked to discover how their statistics were compiled. A general survey was mailed out to manufacturers in the industry. Of the 200 surveys mailed out, a 5 to 10 percent response was claimed. From this the published results were extrapolated.
The problems with these agencies intensified when we questioned their analysts about which piece of equipment was included in which product category and discovered they had no idea what we were discussing. They were grouping different types of equipment together without the slightest understanding of the equipment's applications. Also, the surveys they used were incomprehensible regarding specific product categories.
Many private market engineering organizations are more than willing to describe their data gathering methodologies in-depth, and provide detailed descriptions of their product segment breakdowns. Primary research (such as telephone interviews of industry participants) is used by market analysts to gather information for use in computing growth rates. They learn to interpret the quantitative and qualitative information received in an interview and to formulate growth rates based on that information.
To calculate market growth rates accurately, you must weigh each of your competitor's growth rates by its market share. This becomes extremely important if one or two of the market participants have a dominant market share. Their performance will need to have a higher weight than, for example, a venture capital-funded startup that may have experienced a 20 percent growth rate (see Figure 1):
Figure 1 - Market Growth Rate: Market Share Measurement
|Company ||Annual Sales (USD Million) ||Market Share (%) ||Growth from Previous Year (%) ||Weighted Growth (%)|
|A ||742 ||48.6 ||11 ||5.3|
|B ||617 ||40.4 ||13 ||5.2|
|C ||105 ||6.8 ||24 ||1.6|
|D ||60 ||3.9 ||75 ||2.0|
|Total ||1,524 || || |
|Weighted Average Growth: 15%|
Note: All figures are rounded. Source: Frost & Sullivan
The best information you could have on hand to calculate market growth would be unit and dollar sales for the preceding five years. Without that information, you have to back track and gather the historical figures yourself.
We advocate two methods of gathering this information:
- End-user surveys
- Competitive interviews and analyses
The end-user survey is very expensive because it requires a large sample size. It is also quite time-consuming, particularly when the duration of necessary analysis is considered. We strongly recommend the competitive interview and analysis method. By carefully examining competitor growth rates over a period of years, you can begin to get a firm idea of overall market growth. The accuracy of the method is far from precise, generally within 8 percent to 10 percent. However, the information is still extremely informative and perhaps the best you can do cost-effectively.
The problem with doing the research yourself is that it is often difficult to get the information from other manufacturers. However, by making good use of readily available annual reports, 10-Ks, and quarterly reports, and by interviewing marketing managers, salespeople, and other executives, you can generally put together a pretty good impression of market growth rates. Unfortunately, when trying to acquire this competitive information, you are going to run into some problems. Virtually nobody in your marketing department or competitive analysis group will want to do it. You will hear some of the following excuses:
- "It's unethical. I couldn't do anything like that."
- "They will not talk to us. They are the competition."
- "I would be embarrassed to make that kind of call."
Remember, nobody will be more surprised than you at how much you can learn from just talking to the competition. Establish your contact with them on an up-front, above-board manner and offer to share information with them on an ongoing basis. The benefits of what you learn will far outweigh the costs of what you give away.
What Does Market Growth Rate Really Tell You?
Knowledge of market growth is essential to the market engineer. Market growth is a key indicator of the health of your company. If your company sales growth is greater than or equal to market growth, your firm is comparatively healthy. If, however, your company's growth in sales is less than market growth, it is very likely your firm is in competitive trouble, especially if this is not your strategy.
The market growth rate is also a key indication of the product's stage in the product life cycle (the product life cycle will be discussed in an upcoming section). A high growth rate will usually indicate the market is in the growth phase, where growth is high and saturation is low. A lower, more-stable growth rate indicates product maturation and, of course, a negative market growth rate indicates the product decline stage.
You will want to alter your market strategy for each of the stages of the product life cycle. In any event, being unaware of the market's annual growth rate in units or dollars is a dangerous situation: You are flying blind.
Case Study: Air Pollution Equipment
In an earlier case study, we described a manufacturer of air pollution management equipment that grossly miscalculated its share of the market. That same firm provides an excellent example of the importance of accurately measuring market growth rates.
During a ten-year period, this company did not measure market growth. The firm's management operated under the assumption that since their product had helped create the market, market growth would be similar to their own sales growth, which was averaging about 5.0 percent per year.
Unfortunately for this firm, the market was actually growing at 10 percent per year, and the company lagged behind prevailing market growth rates by 5 percent. As a result, over a ten-year period the firm lost significant market share.
If the firm's management had been aware of the actual rate of market growth, these annual warning signals would have alerted them to the fact that they were losing ground to their competition, and something could have been done.
Today, the company has its own internal market engineering staff that continuously monitors competitors' sales. With these figures, they are able to calculate with relative accuracy the annual growth of the market, total market size, and market share.
This system has made the company a great deal more marketing-oriented in its competitive responses and levels of investment in the company's marketing department. Unfortunately, it is extremely difficult to regain lost market share in a mature market.