6 Steps for Determining Market Size in the Healthcare Sector

6 Steps for Determining Market Size in the Healthcare Sector

In thinking about how to determine market size in healthcare, it’s useful to tell a story. The example I share with you underscores how important it is to know more than business mathematics; you must also closely understand the inner workings of the healthcare sector in order to develop realistic market size estimations. 

A Useful Market Size Example

 The story begins in 2009 when the United States and other countries were hit with a puzzling threat. A virulent form of flu known as “Swine Flu” developed and caused more sickness and mortality than in any recent time. But it would do more than impact the healthcare system — it also confounded market researchers estimating market sizes.  Medical researchers got right to work on a vaccine, utilizing the latest DNA sequencing. The use of the vaccine and the normal decline of the flu season ended the crisis. The vaccine also created revenues for major pharma companies — and increased their costs as well. We estimated that in 2009 makers of H1N1 vaccines reported sales of $3.3 billion, according to our own report. The vaccines were a great market opportunity for them (though it is not all profit; vaccines come with high supply costs).

 "Adherence to clinical practice trends is key. And It’s important when making calculations to be conservative on adoption rates." 

 Not surprisingly, some of our customers wanted to know the size of the “Swine Flu Vaccine Market” and its growth. We provided that number, which would be a few hundred million dollars, and it surprised them. Why, some market research houses created estimates of a $4 billion market in 2010, growing to $7 billion by five years! And in doing so they followed some sound methods, all the usual techniques. Solid revenue estimates, nice assumptions of reasonable vaccine sale growth.

 But they missed the boat.  

 Because they just looked at the numbers. Anyone who knew the mechanisms of the vaccine market would know that H1N1 would be “rolled” into the standard influenza vaccine the next year, used by millions in the United States and purchased by governments around the world. Therefore, the “Swine Flu Vaccine Market” would not be $4 billion, but some small amount representing standing orders, and then, there would be no independent market at all.   

 Calculating a market size can be complicated, especially in healthcare or biotechnology markets. But here's a key — it takes knowledge of clinical practices and pharmaceutical or device technology as much as it takes knowledge of business math. 

How to Calculate Market Size Accurately

Many companies get stuck on establishing boundaries or defining the market before they even get to the data analysis and implications of their research. Determining market size is a great start to discussions about business strategy; it can answer strategic questions about growth targets, and it can determine levels of investment in different business lines. Market sizing can also serve as a quick way to determine where a business opportunity might go in terms of volume or value, and is therefore pertinent to business strategy and decision making.

 Below are the 6 basic steps for estimating market size in healthcare.

1. Define Your Target Market

What market are you looking at? Knowing the level of detail necessary to approach your strategic questions is the key to properly scoping your market sizing approach.  Defining your target market should always be the first step in estimating market size, and it is critical that you do not stray from your determined market definition through the data collection process.  Market size can be viewed in terms of a "Potential Market." This is roughly defined (definitions may vary) as the total market if a product was entirely used by a suited population. Potential Markets will be large but not necessarily obtainable by any company or all companies. This potential market refers to the combined revenue or unit volume in a specified market. For instance, for a testing market, we might consider all visits to a given specialist category. What if everyone who went to the doctor received a given test? This market will be large. It could impress an investor or a CEO.    But usually the “real” market figure is going to be some percentage of that. However, it is likely that all the market will not be utilized. So the “Actual Market,” which can go by many names, will often be some percentage of the potential market.

Then narrow down by geographic scope — US, North America, Europe, etc.  Another factor to consider is the timeframe. Are you looking for historic market sizing or future projections? By defining what should be included in your market sizing estimation, your company can more accurately determine the market potential and the estimated available share of the market.

2. Determine Your Approach to Market Sizing

There are two basic methodologies for determining market size: top-down and bottom-up. Your selected approach may be based on what market information is available. If there is time, the best approach may be to develop market sizing estimations using both methodologies in order to gain a higher confidence in your estimation.

 "Some say bottom-up is generally considered to be more accurate (though it is more time-consuming) because it tends to produce a “hard” number.   But it has its blind spots"

The top-down methodology uses a broad market size figure and determines the percentage that the target market represents. For example, to determine the potential market for cancer drugs, you might start with known sales of cancer drugs by vendor by examining annual reports and other publications of major drug companies. (Because this information is often sealed to the public or disguised in many annual reports, it may be necessary to use a vendor like Kalorama Information who has access to private revenues in some cases and/or can tease revenues out of given information.) The combined sales of major vendors, along with an estimate of “other” will equal the total market. 

The bottom-up methodology builds the potential market by totaling the main variables of the target market. A researcher might total the number of patients with a given disease and the incidence of new cases over a set of years. A percentage of how many of these patients may receive a given drug is then estimated. And then an average price of the drug (of what is earned by the pharmaceutical company).  The result will be the likely market for the drugs. 

Kalorama makes no judgment on either of these methods. Some say bottom-up is generally considered to be more accurate (though it is more time-consuming) because it tends to produce a “hard” number.  Plug in your price, and a percentage of the market you'll capture, and you've got your future revenues.   But it has its blind spots, we caution. A market isn't always as simple as the number of patients multiplied by a price, for instance. There are volume discounts; there are large contracts that real-world companies deal in which distort the models.  Variance in regional distribution and practice differences among providers can also distort bottom up models in healthcare; sometimes top-down based on major player share will provide a valid, if different market size.       

3. Select Sources for Your Market Research

Generally market research is classified in two types.

Primary research, also called field research, is often used in addition to secondary research. The primary research can take on many forms and can strengthen your understanding of the market, allowing you to make better informed assumptions. The most versatile form of primary research is in-depth telephone interviews that can be used to capture more sensitive information. If possible, on-site visits can be used to confirm or contradict market sizing estimations or determine key information on market trends, such as technology, market performance, relative competitive position, or other information dealing with understanding scope and defining the target market.

With primary research, often it is best to use a provider such as Kalorama Information, as we can provide an independent, trusted brand that is able to obtain more information from sources, as we do not represent any one company (Kalorama Information does only multi-client research studies).  

Secondary research of existing data includes company PRs, annual reports, medical journals, trade publications, government economic and demographic data, world ministries of health, CDC and WHO sources, medical association statistics, and drug pipelines. Through general web searching, a wealth of information can be found at little or no cost. However, this information will rarely yield new insights and can put companies in a bad position of following competitors who are Googling the same information.  Subscription-based or syndicated research is a great place to start, but there are also free sources that contain valuable information. Articles about companies or products in the target market will often quote data from these sources. 

Think primary and secondary will reveal what you need? Think again. All information must be massaged, triangulated, and compared to one another to be sure it matches with your model. For instance, just learning that a given disease is growing in cases does not mean treatment is being fully utilized or there will be a large market for a device, test, or drug. 

Pitfall alert!! Common pitfalls or mistakes often start early on by not properly defining the market or gathering data from non-reputable sources. A poor source in this part of the process can lead to poor results. Think that a result that you Googled is a good result, for instance, because a number of sources agree? That may have been true a few years ago, but unfortunately, in market research today, there are numerous sources that follow each other in making market calls, so a well-repeated market data point may actually be the worst to follow. Sources can differ in what they include in a market. 

4. Segment Your Market Data

To further develop your understanding of the market, it is important to gather trend information, which is typically in the form of qualitative data. This information can come through secondary research or comments from primary research. If we look at cancer drugs, it may be of interest to evaluate trends for specific segments such as monoclonal antibodies, interferons, or kinase inhibitors. It also may be useful to narrow markets by disease — lung, stomach, lymphomas, etc. 

The market definition should remain consistent throughout the data collection process and methodology should be based on market knowledge — not just demographics. Where possible, attempt to verify each significant finding through multiple published source materials or primary research. By confirming findings, you are able to leverage the value of various information sources and thus increase confidence in the final results.

5. Analyze Your Data Like a Third Party

Simply stated, analyze the data you've created as if you are a third party. Maybe put your estimates aside for a day or a few hours before doing this. Consider other published and credible estimates if available (but don't develop a blind adherence to any published source — you have considered the market as much as anyone on the Web at this point).  If a published source has a higher number, ask how could this be true and your estimate be so much lower? The answer will probably come down to step 6 (highlighted below), which was the case with our swine flu vaccine example. Or it may come down to a different consideration (an estimate is including medical research, while your market estimate includes only clinical). Perhaps you are including too much revenue from a division in a company that produces more than just the item you are creating a market for. 

As mentioned above, it is often necessary to develop multiple estimates using different approaches or sources. This is called triangulation. When multiple sources or estimations triangulate, the confidence in a market estimate increases.  It's rare, however to see that happen. If the approaches widely differ, additional research is required to reduce risk and is recommended to narrow the range of market sizing estimates.

6. Hold Your Numbers Under the Magnifying Glass of Reimbursement and Clinical Practice

After you've come up with numbers, healthcare markets require at least two additional steps, which we've collapsed into one step here. You need to “cleanse” your numbers with a consideration of what governments or insurance companies will pay for and what doctors will use. For a test to work, significant medical practice must be changed, medical societies should endorse the method, and journal articles should describe the effectiveness. There should be much talk of its usage generally. Adherence to clinical practice is key. It’s important when making calculations to be conservative on adoption rates for a new product. We are mindful of times a decade ago where molecular testing was expected to replace every non-molecular test. Molecular is a powerful market, but it has not replaced traditional technologies that are still effective.  

 Following these methods will provide sound estimates. But it will be time-consuming and difficult to do accurately. We suggest using syndicated research like Kalorama Information to complete research. 


Interested to know more about our industry research?

Download one of our free white papers today.

Explore Our Resource Library