Key Methods for Market Sizing, Segmentation, and Forecasting

An accurate understanding of market sizing, segmentation, and forecasting is critical for a wide variety of strategic initiatives, including M&A due diligence, new market entry, large-scale capital investment, and general strategic planning.

However, companies often face significant challenges when determining market size estimates, particularly if they have a siloed perspective, a market with many levels of complexity, and disparate data sources of varying quality. Additionally, they may lack access to competitor information as well as the time and specialized knowledge required for this kind of research.

For more than 15 years, Freedonia Custom Research has served as a trusted partner to companies across the value chain, providing reliable market sizing, segmentation, and forecasting data. Our expertise helps businesses overcome these challenges to gain the insights needed to make defensible, informed decisions. Below, we explain market sizing, segmentation, and forecasting methods and provide specific client examples to bring these concepts to life.

What Is Market Sizing and Segmentation?

Market size refers to the annual volume or value of a product sold and represents the total opportunity available for companies supplying those goods. Demand can be segmented into groups that share similar characteristics, which can be standalone, such as demand by geography, or nested, as in demand by geography by product by material.

For example, the window market can be segmented by region (such as window demand in the US versus Asia), by product type (such as aluminum frame, wood frame, and vinyl frame), and nested, (such as US window demand segmented by frame type).

Market segmentation can answer the question, "How is window demand by frame type different in the US versus Asia, and what products do I develop for the US market versus the Asia market?"

In an analysis, it’s important not to overlook any segments within the scope of your research. Primary research, such as in-depth interviews with industry participants, can help identify all potential segments within the market.

Why Market Sizing Is Essential

Accurate market sizing and segmentation is vital for strategic planning. Incorrect guidance can lead to missed opportunities if the market potential is underestimated, or to excessive losses if demand is overestimated.

For example, if a company is looking to expand into a new geographic market, a precise understanding of market demand will help them plan an appropriate product mix, set realistic sales targets, and allocate sales representatives effectively. Missing the mark in any of these areas could have negative long-term repercussions.

Top-Down and Bottom-Up Market Sizing

There are two different approaches to sizing a market:

• In a top-down approach, the starting point is an existing, or easily developed, estimate of total demand for a given product that needs to be further segmented or refined into quantifiable segments (such as different product types, technologies, and end-markets) based on the scope of the research.
• In a bottom-up approach, demand is calculated by applying usage assumptions to an indicator or statistic that directly relates to the product being consumed. A simplified example of this approach is determining US single-family window demand based on Freedonia's internal construction indicators, such as the number of single-family homes built in 2023 and the average number of windows per home.

As shown in the graphic below, the bottom-up approach can include a combination of data generated through primary and secondary research, economic modeling, and historical demand.

A bottom-up approach is usually considered the most defensible method, but it is also the most time and labor intensive. The method you choose will depend on what market information is available. It’s best to use both methods, when possible.

What Is Market Forecasting?

Market forecasting is a projection estimating the future performance of a market based on supply and demand, quantified either in value or volume. The projection is estimated through a thorough analysis of quantitative data (such as indicators, sales, and market share) and qualitative information (including regulatory factors and voice of the market) to estimate the growth of a market over a set period of time. The purpose of market forecasting is to help companies focus their strategic efforts on areas with the greatest opportunity for gains in market share, margins, and/or revenues.

Keep in mind that market forecasting requires more than just plugging numbers into a formula. To arrive at a justifiable market forecast, you may need to make sense of contradictory pieces of information, combine both quantitative and qualitative research, and account for some inputs that are not numerical. Anticipating future market conditions is a skill that can be learned and refined based on experience and knowledge of the market.

Market Sizing Example for Acquisition Due Diligence

To understand how these techniques are used in practice, consider this market sizing example from one of our clients (kept anonymous for confidentiality reasons).   

Our client, a manufacturer of industrial and consumer products, was interested in purchasing a competitor. They needed a due diligence assessment of the global light-duty and heavy-duty aftermarket filtration industry within a tight timeframe: just four weeks.

The stakes were high. The acquisition would cost the company $8 billion, and they needed to know if the purchase would yield a good return on investment.

To correctly size the market and understand the value of this opportunity, we conducted 60 primary interviews with industry participants in four regions of the world, targeting manufacturers, distributors, and other participants in a range of sales channels. We calculated current and forecast demand in each region, incorporating various key factors such as usage rates, consumer preferences, the evolving regulatory environment, potential threats to growth, emerging technologies, and other macroeconomic factors.

In the process, we uncovered a valuable piece of information that proved to be a game-changer. We determined that in less developed areas of the world, end-users vacuumed out their filters to reuse them, instead of purchasing new replacements when the filters were full. Consequently, the market demand in this region was lower than expected and the sale price of the company was overvalued. As a result, the client chose not to move forward with the multi-billion-dollar acquisition, avoiding a potentially costly mistake.

Market Sizing Example for Strategic Planning

Another example involves a global equipment manufacturer that needed an external perspective on the tree-cutting equipment market. Although this company was a global leader, they struggled to estimate the total addressable market due to the lack of available data. Market sizing, segmentation, and forecasting data was needed for developing their long-term strategic plan and making decisions on investment levels for expanding specific product categories.

The client faced several obstacles. They were unable to access competitor information and reach key constituent groups for primary research. Their view of the broader market was incomplete, with internal knowledge limited to a collection of hypotheses from sales representatives. In addition, they lacked the internal capacity to complete analysis work and the expertise to determine market sizing.

Freedonia Custom Research partnered with the client to fill this information gap by conducting in-depth interviews with key customers to uncover purchase habits, product preferences, and usage patterns. This data was combined with Freedonia’s secondary market research and macroeconomic indicators to evaluate the target market and substantiate demand estimates.

Our in-depth research enabled the company to move forward with key decisions, such as:

• Plan production capacity expansions
• Hire and allocate sales professionals and resources
• Identify and prioritize the most profitable market opportunities
• Pinpoint opportunities for product diversification

Upon receiving our research, the client responded with glowing feedback.

Why Choose Us?

As these examples demonstrate, Freedonia Custom Research seamlessly integrates with your team to provide access to valuable, unbiased market insights that are often difficult to obtain independently. We expertly analyze ambiguous data, conduct primary research across every node in the value chain, and triangulate multiple data sources to deliver a comprehensive view of the market.

The market information we provide is substantiated and actionable, enabling you to confidently present it to executives and other decision-makers, and build the groundwork for key initiatives at your company.

With Freedonia Custom Research, you gain a strategic partner dedicated to delivering the critical market insights you need to make effective, informed decisions.

Get in Touch

Need assistance with market sizing, segmentation, and forecasting? Reach out to us today to discuss your goals.

Even if your research deliverables aren’t fully defined yet, we can collaborate with you to scope out the project and address your information needs.