As Field Service Organizations (FSOs) strive to build and grow profitable businesses, they must develop and implement strategies based on valid and reliable market research. Assessing market demand is critical for making optimal decisions with respect to investment and resource allocation. For example, it might be important to know the size and growth rate of a market segment prior to building a marketing strategy, establishing a division, or developing a service offering for it. If the market segment is large and growing rapidly then a more aggressive investment may be warranted. Taking a more conservative approach could lead to a miscalculated decision that results in a significant loss or failure for the company.
While obtaining a granular level of data on the size and growth rate of a market segment can help service executives make better decisions and ensure better results, it is surprising that many do not attempt to obtain this level of insight. Instead, service executives often rely on gut instinct or settle on an order of magnitude, given some related indicator. For example, we often hear service executives claim that the service market must be big because the sales of the product are so high. In other words, its “big enough” to warrant an investment.
The problem with this type of market analysis is that it assumes that 100% of people who have bought a product will also purchase the service. It also does not take account the size of the installed base, competitive issues, or other constraints or factors influencing demand such at technology trends, economic trends, or market trends. More importantly, it does not provide any hard data into the size of the market or its growth rate.
While surveys and secondary research have merit when it comes to market sizing and forecast, they too have their shortcomings. Surveys and secondary research can of course provide insight into size and growth of a market as well as answer questions with respect to who buys, what do they buy, and factors influencing supply and demand. However, they do not actually measure the actual size and growth of the Total Available Market (TAM) for the service under consideration. In addition, a shortcoming of secondary research that we hear often is that it is not specific enough or tailored in its the perspective. Questions about the research methodology may also arise when the source is an industry analyst.
Ultimately, a good TAM analysis is one that takes into account the size and growth rate of the installed base as well as the serviceable value of the installed base along with its anticipated growth rate. We have found econometric market models to be very effective methods for conducting this type of service market analysis. A good econometric model considers several data points related to buyers and products including but not limited to the number and types of buying organizations, equipment penetration rates (i.e., shipments), population density, and replacement rates. These factors help in determining the size and value of the installed base while surveys and secondary research provides data points (e.g., price points, average spend, etc.) necessary for determining current and projected revenues and/or expenditures for a given service.
Building an econometric model to determine the size and forecast of the TAM for services may seem like a lot of work. However, the efforts are worth it and can prevent a company from making serious mistakes and/or miscalculations about their market opportunity. Several years ago, a client of mine gave a presentation at an industry conference where his competitors were present. The presentation showed that his service business was growing twice as fast as the market. Although he had commissioned our firm to build a TAM model, he chose to compare his company’s revenue growth to market size data from an industry analyst’s report (i.e., secondary research). This analyst provide a market size estimate and forecast that was more conservative than ours. After the presentation, I asked my client why he didn’t present our data. “We based our investment and resource allocation decisions on your model not the secondary research. We want to keep this fact a secret from our competitors as long as we can” was his reply. Had his company relied only on secondary data they would have had different results. His answer provided that his investment in building the market model was well worth it.
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