Market growth rate

Market growth rate shows whether the defined market in which a company operates is expanding or contracting. Used with market size, share, profitability and competitive evidence, it helps management assess future revenue potential.

When to use it

• Answer the key performance question: “To what extent are we operating in markets with future potential?”
• Assess this KPI within the Marketing and sales perspective.
• Plan how the market boundary, data sources, formula and reporting frequency will be governed.
• Compare actual and forecast movement with relevant targets, scenarios and market evidence.

Origins

Market growth rate does not belong to a single inventor. It developed from the long-standing economic and market-research practice of comparing demand or sales across periods, and became a common strategic KPI as portfolio planning placed greater emphasis on the growth of the markets in which a business competes.

What it is

Perspective: Marketing and sales perspective.

Key performance question: To what extent are we operating in markets with future potential?

Define the market first: customer group, need, geography, channel, product boundary and measurement period. Market size is the total value or volume of goods or services sold within that boundary. Growth can be expressed as a change or percentage; in the ratio form used here, current-period size is divided by prior-period size. A result below 1 denotes contraction, while a result above 1 denotes expansion.

The indicator is directional rather than sufficient on its own. A growing market can be unprofitable or inaccessible, and a contracting market can still support an attractive specialist position. Interpret growth with share, margins, substitution, regulation and the reliability of the estimate.

How to use it

Measurement

Record the market definition, measurement unit, currency treatment, source, cut-off date and any restatement policy. Keep these consistent across periods; otherwise a boundary or price change can masquerade as real growth.

Data collection method

Use independent published data when it fit the defined market. If direct data are unavailable, triangulate several approaches:

• Survey suppliers or providers, correcting where possible for overstatement and incomplete participation.
• Measure activity through distributors or channels, controlling for double counting and uncovered routes to market.
• Survey customers or end users, recognising that representative samples can be costly and stated behaviour may differ from purchases.

Reconcile top-down and bottom-up estimates and report a range when the evidence does not justify a single point.

Formula

Sales may be measured in monetary value or units. State whether the result reflects nominal price movement, inflation-adjusted value or physical volume.

Frequency

The underlying market is often measured annually. A quarterly, annual-rolling view can reveal direction sooner, provided seasonality and revision lags are handled consistently.

Source of the data

Sources include official statistics, trade bodies, regulatory returns, syndicated research, company disclosures, channel records and commissioned surveys. Preserve provenance and disclose material estimation assumptions.

Cost/effort in collecting the data

Effort varies widely. Public data may be inexpensive but broad or delayed; specialist research may be costly but better aligned; primary research can be tailored but requires sound sampling, cleaning and reconciliation.

Target setting/benchmarks

There is no universal benchmark because normal growth differs by sector, maturity, geography and economic conditions. Faster growth can be favourable, but it can also attract competition and capital. Some firms deliberately serve shrinking markets where exits create defensible niches. Set targets against the economics and strategic role of the specific market.

Example

For market X, size in 2010 was $500m and in 2011 it was $750m.

The absolute increase is $250m = $750m − $500m.

The corresponding growth rate is:

For market Y, size in 2010 was $500m and in 2011 it was $400m.

The absolute decrease is $100m = $500m − $400m.

The corresponding growth rate is:

Before comparing the two, verify that both estimates use the same market definition and distinguish price effects from changes in demand.

Top practical tip

Maintain actual, forecast and scenario views, and show the estimate as a range when source uncertainty is material. Average basket size can add context by relating total market size to the number of customers.

Top pitfall

Do not confuse growth caused by inflation, currency or a changed market boundary with growth in underlying demand. A precise ratio built on inconsistent market definitions is misleading.

Further reading

David J. Reibstein, Neil T. Bendle, Paul W. Farris and Phillip E. Pfeifer, Marketing metrics: understanding market share and related metrics, in Marketing Metrics: 50+ Metrics Every Executive Should Master, Prentice Hall, 2006.