Market value belongs to one of the most vital pieces of information in every type of business. This type of data is needed by companies to allow them to effectively operate on the contemporary, hugely competitive market. It helps, among other things, in estimating possible revenue that can be generated by an enterprise on a particular market. Values estimated for a couple of subsequent years, in turn, can illustrate changes taking place on the market.
Estimating market value is a challenging task. It requires one to obtain market data from primary and secondary sources. What is also essential are specific market analysis skills. Obtained results will not be reliable if one fails to also consider expert knowledge about a given industry.
For this reason, market estimation cannot always be conducted in-house and often becomes a subject of consulting and research projects.
In this article we would like to present 4 approaches that have been tested by PMR experts. The selection of a specific method and its implementation depends, among other things, on the industry and the nature of a given market.
- What is market value?
- Market value is the total value of all products and/or services sold on a given market within a year.
1. Production and foreign trade
In line with the first method market size and value are calculated as a difference between production and foreign trade balance for a given group of products.
This method requires access to statistical data. Therefore, it is most useful in case of general product categories for whom statistical data offices collect detailed information (e.g. cement or meat). In case of narrower markets this method may also prove useful, but as a point of departure for further analyses.
This method allows one to discover the size and value of the market in the analysed years and subsequent periods. It may, therefore, be a basis for preparing market value forecasts using econometric modelling. After adopting relevant assumptions concerning the structure of each analysed category, one may establish market value for investigated components.
When applying that estimation technique analysts encounter, in most cases, three challenges:
- Lack of data – In case it is impossible to obtain reliable information concerning particular product categories, one needs to estimate the missing values. That, in turn, requires extensive knowledge about the industry, business experience and familiarity with advanced analytical methods.
- Data concerning one category coming from various sources – Sometimes available information must be obtained from several market intelligence and statistical databases. It means that data can be inconsistent. Therefore, information must be compared and unified, which may be challenging for an analyst without relevant experience.
- Changing the definition of the investigated category in subsequent years – Changes happening on the market necessitate modification of data analysis techniques. It may happen, therefore, that we will fail to find comparable time sections and then, estimation will be needed again.
2. Key market players
The second approach to estimating market value consists in analysing revenues generated by key players on a given market (see also: competition analysis). This method leads us to the goal straight away, that means, it allows us to immediately arrive at the market value.
Yet, in order to estimate market size using that methodology one needs to adopt additional assumptions. Usually they relate to the revenue structure of particular companies. Therefore, it is advisable to apply that method in case of heavily concentrated markets where the share of minor players is insignificant. A good example illustrating the application of that approach is the analysis of clothing discount stores and loyalty programs.
Potential problems that may arise while estimating the market by this method include:
- Lack of data – In this case one needs to adopt certain assumptions based on available information and prepare relevant estimates.
- Incorrect method for estimating the share of other players – The key competence that an analyst should have is the deep knowledge of data estimation techniques (both in terms of analysis methods, their applications and limitations).
- Broad scope of business activity conducted by market players –When the analysed company runs business on various markets or offers a broad range of various products one may struggle with establishing what share of the value corresponds to a particular market.
3. Declarations of market participants
The point of departure for estimating market value are, in this case, market participants’ declarations. Data usually come from dedicated market research (e.g. questionnaires). Depending on the estimated market, one can analyse households, companies or public institutions.
In the course of data gathering one can also use other sources, e.g. make use of existent survey analyses. Household budget survey that is published by the statistical offices on a yearly basis may serve as a good example here.
The biggest advantage of this approach is the fact that in order to arrive at market value one may sometimes only need secondary data. Hence, the methodology may be applied with respect to many specific markets. This group includes for example lightweight construction or lighting products (light fittings, light sources).
What is important, based on data concerning the whole population of consumers the results may be generalised and an estimated picture of total domestic consumption may be obtained.
These are the three challenges one may face when estimating the market by means of market participants’ declarations:
- Survey methodology must be professional and well-prepared – It means that, for example, all respondents must have the same understanding of product categories that the researcher is asking about, questions must be adequately asked and adapted to a particular respondent type, the survey must have appropriate length and structure and the method (CATI, CAWI) must correspond to the research objective.
- Research sample must be representative and very well-constructed (e.g. right number, random selection from the whole population) – Otherwise, it is easy to make a mistake, which may lead to wrong conclusions from the analysis.
- Effort should be made to get a comprehensive picture of the market – In order to learn about the market from every perspective one may sometimes need to conduct market research in several groups of respondents (e.g. distributors, B2B recipients such as construction companies, as well as B2C recipients such as households).
4. The analysis of public tenders
The last method of estimating market value that we would like to present is the analysis of public tender results. Thanks to this method one may also forecast the size and value of the market by creating time series for the analysed year and subsequent periods.
This approach is most commonly adopted with respect to public sector. The reason for its frequent application in the public sector is the fact that it is possible to obtain comprehensive data directly from the source, so that data is not burdened with possible estimation errors.
It can also be used when implementing projects for the private sector despite limitations concerning shortage of available comprehensive information. Yet, in this case thorough knowledge and experience of the analyst is essential. An example illustrating such an application of public tender analysis is the medical devices market.
Shortcomings of the public tender analysis primarily include:
- The need to estimate value for the private sector – Actual results can only be obtained through the analysis of public sector procurement, private sector needs to rely on some estimates.
- Incomplete data concerning the sale of some products – Usually that problem relates to cheap products as there is no obligation to organise a tender under a certain threshold (e.g. below 30,000 EUR in Poland).
- Differences between countries – In case of analyses of international scope, what can pose a challenge is combining data coming from different countries. Depending on the country there are different limits for tender procedure obligation and there is also variation between the size of the public and private market.
Market value – should we estimate it in-house or commission it to experts?
Estimating market value is a broad and complicated issue. Approaches presented in this article do not exhaust that topic, they only describe the most important methods – their applications and limitations. In our research and consulting work we often apply other methodologies as well – those that best suit the characteristics of a given market or country. In some cases we also adopt approaches that combine several methods.
In order to estimate market value and obtain reliable data what is needed is knowledge, experience and analytical tools. If such resources are at the disposal of the company, projects can be successfully conducted without the involvement of external experts.
Yet, if even one element is missing or when one needs reliable, dedicated market research study, cooperation with an experienced partner is worth considering. The best choice will be a research and consulting company that can offer comprehensive support – starting from market research, through market forecasts and ending with business consulting.