How to Measure Your Market Opportunity for Business Success

Transcription

1 INSIDER S GUIDE BUILDING PRODUCT MANUFACTURERS DISTRIBUTORS, CONTRACTORS SERVICE COMPANIES How to Measure Your Market Opportunity for Business Success

2 Introduction Knowing your market opportunity allows you to better manage your business and make more effective decisions. As the famous management consultant Peter Drucker professed, You can t manage what you don t measure. Whether you use your own sales people, independent reps, or distributors, having a realistic understanding of your company s market opportunity enables you to make more effective decisions about your sales, marketing and product performance. This guide will show you ways to measure your market opportunity, what data to use, and where to find it whether from new construction activity, major addition or renovation projects, or the maintenance and repair of the stock of existing buildings.

3 1 Focus on the Right Construction Activity Numbers Measuring your market opportunity using Total construction activity can be misleading, since the number is a combination of three broad Categories: Nonresidential: Commercial, institutional & manufacturing buildings Residential: Single & multifamily housing Nonbuilding (a.k.a. Infrastructure): Streets & highways, bridges, water supply systems, etc. These categories do not always move in the same direction over time. For example, total construction may be up 4% over the prior year, but individual category performance shows nonresidential up 16%, residential down 10%, and nonbuilding unchanged. If your products and/or services are sold primarily within one of these categories, then knowing only that total construction is up 4% doesn t help you more accurately measure your market opportunity. *INSIDER TIP Knowing your market opportunity informs effective decision making.

4 2 Dig Deeper into the Data Even within a single category, to accurately measure your market opportunity you need to dig deeper. If your product, for example, sells well into the office and education Sectors of nonresidential construction but not as well into either the commercial warehouse or retail sectors, it s important to understand how each sector has tracked over time and is expected to perform in the future. Just as construction categories don t mimic each other over time, sector construction activity also differs. This is because the basic economic drivers that create demand at the sector level are not the same. For instance, office vacancy rates drive demand in office construction, while the issuance of local bonds is critical to the education sector.

5 3 Dissect Construction Activity by Geography The change in national U.S. construction activity is never a reflection of what s happening in a specific region, state, or local market. For example, the national U.S. office construction sector grew an average of nearly 40% from 2010 to However, growth for the top three states for office starts varied greatly from the national average: California roughly 125%, New York slightly above 25%, and Texas exceeding 200%. Successfully measuring your market opportunity requires that you dissect construction activity by geography. 37% 126% 27% 216% U.S. Total California New York Texas Average Office Starts ( ) Growth from 2010 Office Starts

6 4 Gauge True Performance Analyzing construction activity by more discrete geographies allows you to gauge the absolute and comparative size of your market opportunity now, in addition to its change over time. It can also help you more objectively assess performance and help set expectations. If sales territory or distributor A has twice as many sales as sales territory or distributor B, does it mean territory A is performing better? Not necessarily. If territory A s market opportunity is three times greater than territory B s, then in truth territory A is not performing as well against its market opportunity.

7 4 Using our earlier example, while office construction activity in New York trailed behind Texas and California on a percent growth basis, its absolute size is almost twice theirs and accounted for 17% of the U.S. total. Interestingly, Massachusetts ranked as the fourth largest state for office construction starts from 2011 through 2015, at slightly less than half the size of Texas and California. $2.16 9% 17% $4.02 $2.16 9% $0.95 California New York Texas Massachusets Average Office Starts ( ) Values in Billions and % of U.S. Total 4%

8 5 Expected Construction Activity Needs Context Knowing that today s temperature is 10 degrees higher than yesterday s is only valuable if you have context. Was yesterday s temperature 60 degrees or 80 degrees? And was that considered low, high or average? The same need for context holds true for understanding next year s expected construction activity, which creates your market opportunity. *INSIDER TIP Based on expected sustainable demand, annual single family housing starts should be about one million units.

9 5 By viewing your market opportunity as a time series, you have the historical perspective to interpret expected change, be it positive or negative. For instance, having known in 2011 that single family housing units would record back-to-back annual increases of 25% in 2012 and 21% in 2013 is not good enough. To reveal the full story, a historical time series of single family housing starts is needed. As you can see from the graph, even with two years of very strong annual growth, single family housing in ,700 1,500 1,300 1, % 21% ,000 units amounted to a weak 624,000 units. Single Family Housing Starts Annual % Change Units in Thousands

10 6 Understand the Two Standard Measures The two standard measures of construction activity are the U.S. Census Construction Value Put in Place, a.k.a. construction spending, and Dodge Data & Analytics Construction Starts. They exist for different reasons. overall economic activity to understand how the economy is performing, and as a result enacts appropriate policymaking decisions. Private companies also rely on this government-generated data to evaluate business conditions and react accordingly. *INSIDER TIP It s important to understand the differences between the two standard measures of construction activity. The federal government, mainly through the U.S. Census Department, tracks Census Construction Value Put in Place is a coincident indicator. That s because it

11 6 records construction spending as it occurs. For example, if a $40 million office building starts construction in January, then Census records each month how much of the $40 million has actually been spent until construction is complete. records the entire $40 million in the month of January when the project starts. Therefore, Construction Starts indicates what will be spent, while Construction Value Put in Place indicates what has been spent. Dodge Data & Analytics Construction Starts is a leading indicator. This is because Dodge Data & Analytics, using the same $40 million office project,

12 7 Use Construction Starts to Gauge Opportunity The Census Department s Construction Value Put in Place suffices to measure the overall health of construction in the U.S. economy. Dodge Data & Analytics Construction Starts data, because it s a leading indicator of forthcoming construction spend and is compiled from individual Dodge Reports, enables building product manufacturers and other firms whose products and services are sold into the construction industry to gauge in advance the direction and change in their market opportunity at a granular level. Whether you sell nationally, regionally, or locally, this data can conform to your specific requirements, giving you the insights needed to make more effective business decisions. *INSIDER TIP Dodge s Construction Starts data is built up from the summation of individual Dodge Reports.

13 8 Refine Your Market Opportunity Tracking the movement of Construction Starts for those sectors creating demand for your products and/or services has great value in helping you make better business decisions. Historical and forecast changes in Construction Starts for the combination of these sectors, by itself, is often a very good proxy for understanding your market opportunity. However, you can further calibrate *INSIDER TIP Take additional steps to convert construction activity into market opportunity.

14 8 your market opportunity by applying four additional refinements: Lags Usage Weights Use Factors Existing Building Stock Lags. Depending on the product or service being sold, the Lag meaning the time in months between when market opportunity is realized versus when a project s Construction Start occurs will vary. For finishing products, such as flooring and acoustical ceilings, Lag time will be longer than for other products, such as curtain wall, roofing and HVAC equipment.

15 8 Lags also vary by project size and in some instances by sector. Just as a $100 million hospital project takes longer to build than one half as large, an office building will typically take more time to construct than a similar-sized warehouse. By combining Census Department data with knowledge of when your products or services are sold and installed, you can determine the appropriate Lags to apply to Construction Starts, shifting the timing of the Construction Starts series to better align to when your market opportunity occurs. Usage Weight. Usage Weight is a comparative weight or ranking of how much market opportunity you expect from Cumulative % Complete 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Months from Construction Start Nonresidential Buildings $10M or more $5M<$10M $3M<$5M $1M<$3M

16 8 the same amount of Construction Starts Use Factor. Use Factor is a from projects done in-house (for bidding from one sector to another. For instance, measurement of how much of a projects directly or through distributors); if your expected market opportunity is ten specific product or products is used your company s sales records; and bids times more from a $20 million healthcare in projects in each sector. Use Factor prepared for contractors. Greater use of project versus a $20 million retail project, allows you to calculate that X amount CRM software and better mining of in- then healthcare s Usage Weight is ten of market opportunity is generated house data have made generating a Use (10) and retail one (1). If a $20 million for your product(s) by Y amount of Factor more viable than in the past. office project s market opportunity falls Construction Starts. roughly in between, then its Usage Weight Existing Building Stock. A significant is five (5), and so on. Knowledgeable You can develop a Use Factor in various share of total market opportunity for individuals within your firm can often ways, including: quantity take-offs from your company may result from an come up with a basic Usage Weight. building plans, either outsourced or owner s need to properly maintain and

17 8 repair their building(s). Replacing or upgrading roofs, locksets, door closures, and geography the existing stock buildings slated for a major addition or Your market opportunity generated from Construction Starts generally has a much toilet partitions, carpeting, and plumbing renovation project. Additionally, knowing greater degree of change over time than fixtures are all examples of this type of the age of the existing stock will enable from the existing stock. You can measure market opportunity. you to factor in the length of your the change in market opportunity product s life cycle, i.e. how many years for existing building stock by applying Knowing the existing stock of buildings before it needs to be replaced or to indicators of a sector s more general is the best way to size this maintenance determine what portion of the existing economic health. For instance, for K-12 and repair market opportunity. stock is old enough to have originally schools it could be the passage of local Similar to understanding your market installed products replaced with bond initiatives, for hotels the change opportunity from new construction those that are more energy efficient, in revenues per available room, and for activity, you need to assess by sector representing market opportunity. offices the change in vacancy rates.

18 The Bottom Line To better manage your business, you need to understand your market opportunity. To uncover and measure that market opportunity requires that you understand how the construction sectors that sell well for your product or service perform over time, pinpoint the geographic areas that have the best potential, use historical data to anticipate change, and further refine those opportunities to make the best decisions. Armed with a realistic measurement of your market opportunities, you re ready to achieve business success.

19 Additional Resources to Grow Your Business To learn more about how you can grow your business, visit Call to find out how Dodge can customize a solution for you. About Dodge Data & Analytics Dodge Data & Analytics is a technology-driven construction project data, analytics and insights provider. Dodge provides trusted market intelligence that helps construction professionals grow their business, and is redefining and recreating the business tools and processes on which the industry relies. Dodge is creating an integrated platform that unifies and simplifies the design, bid and build process, bringing data on people, projects and products into a single hub for the entire industry, from building product manufacturers to contractors and specialty trades to architects and engineers. The company s products include Dodge Global Network, Dodge PlanRoom, Dodge PipeLine, Dodge SpecShare, Dodge BuildShare, Dodge MarketShare, and the Sweets family of products. To learn more, visit

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