The Science and Art of Market Sizing

by Michael Ikpoki | June 20th, 2022

Market sizing is the process of estimating the potential of a market. A market sizing process confirms whether a market is big enough to justify an investment of time and resources by the potential investor. It also determines an indicative business model and market strategy for the market entrant. Some other logical questions to be answered in this same vein include quantifying the value of the market and understanding consumer needs and economic trends impacting the industry. Also, having a clear-eyed view of the present and evolving competitive market landscape (and indicative market share thereof) which includes the medium to long-term industry growth forecast.

Market sizing can be undertaken by defining a broad universe target market and applying filters to arrive at an estimation of the specific market space. Conversely, market sizing can be a bottom-up approach where projections of individual clusters or customer segments are used to work to the estimated market size and growth potential. In either case, proper market sizing can only be done by accessing reliable data from the following sources: statistics, data mining, competitive intelligence, and market research. This in essence is the science of market sizing. The estimates or outcomes thereof can only be as good as the quality or authenticity of the information derived. Therein lies the problem. In some African markets, obtaining reliable data can be a challenge. Some government statistics offices are not well equipped and industry data is not well collated by regulators and industry groups. Correlating data will have to be sought, comparable forecasts and reports will have to be analyzed and informed extrapolations made to arrive at some informed conclusions. For example, in most markets, telecom subscriber information is usually available and is a good starting point that can be adapted for market-sizing requirements in specific market spaces.

So how much empirical data or intelligence will be required to conclude a reliable market-sizing exercise which informs an investment decision? Most African markets are fragmented and predominantly informal. Endeavor Nigeria in its Report – The Inflection point: Africa’s digital economy is poised to take off (June 2022) sets out some realities in the African market. It posits that one-third of commercial activity and 80% of employment in Africa is in the informal economy. It states that Micro & SME businesses contribute 40%, 49% and 50% respectively to National GDP in Kenya, Nigeria, and South Africa respectively. The report showcases how several home-grown entrepreneurs and companies are unleashing digital solutions to solve significant problems and in the same process, building good businesses in African economies. All of these are nuanced by specific needs and realities in these markets. This suggests that instead of trying to size an existing market space, maybe the discussion should be more about identifying opportunities for solving significant problems in the marketplace which unlocks infinite growth opportunities. It is very unlikely that fintech companies like Flutterwave, Interswitch or MFS Africa would have relied fully on traditional empirical market sizing before investing in building payment and interoperability platforms across Africa. Even if they did, their projections would have fantastically under-estimated the market potentials they are now realizing. There is an entrepreneurial and somewhat market-informed “leap of faith” that drives companies like these into investing in African markets to solve real problems and in the process unlock real unquantifiable value. A company like DufilFoods had the same “leap of faith” in pioneering the instant noodle business in Nigeria in 1996 and has grown to become the largest noodle manufacturing business in Africa. This is the new entrepreneurial African spirit exhibited by gutsy entrepreneurs with strong convictions driven to solve significant problems in African markets. More of these entrepreneurs are now being supported with institutional capital. Businesses and investors in African markets, whether in technology or other sectors, can lean into this new thinking of creating new opportunities, services, and solutions rather than simply participating in existing sectors without more value-add or innovation.

This is not to discount the importance of market sizing exercises. Indeed, proper market sizing analysis must be done by prospective investors using companies that have analytical expertise and a good grasp of the local market. However, as we think more about opportunities waiting to be harnessed to solve real problems in African markets, market sizing assumes more of an art form. In these cases, market-sizing is less of mechanical activity and becomes more of an experiential process of understanding value created from the new services and solutions introduced into the market.