How to size invisible markets and tap into oceans of demand


Aug 4, 2020

In our research studying pathways to prosperity in emerging economies, we’ve discovered that a particular type of innovation—market creating innovation—can be a powerful engine of sustainable growth. Market-creating innovations transform complicated and expensive products into products that are simple and affordable, making them accessible to a whole new segment of people for whom there was always underlying demand, but no adequate solution on the market. We call this segment of the population “nonconsumers.”

In many emerging economies, the population of nonconsumers for most products and services, even basic ones, surpasses that of consumers. Despite the size of the potential market and eagerness of nonconsumers to embrace commercial solutions that are priced within their means, unfortunately, there is often a lack of support for new businesses that can provide them. Many investors mistakenly assume that emerging economies cannot support these new products because of the inherent difficulty with analyzing nonconsumption opportunities.

It’s hard to count what isn’t there

Analyzing nonconsumption is challenging for investors accustomed to traditional methods of sizing markets. By definition, nonconsumption is “invisible” from conventional data collection. Nonconsumption refers to underlying demand that exists but that goes unexpressed for lack of suitable products. Instead, people go without, all the while retaining the underlying need to make progress in an area of their lives. So, with no transactions or receipts to count, data appear to show a miniscule market opportunity.

Traditional market analysis also does not account for the impact a new business model can have in profitably pricing things lower, increasing the potential market size. For example, when Richard Leftley’s MicroEnsure decided to develop insurance products for millions of people who earned less than $5 a day, his colleagues ridiculed him. Average health insurance premiums in the United States, for instance, cost around $350 a month. How could there possibly be a market for people who barely earned $200 a month? Yet, today MicroEnsure provides a variety of insurance products to more than 65 million customers—85% of whom had never purchased insurance before. The early doubters of the concept failed to imagine the possibility of a new business model that could dramatically expand the insurance market by bringing nonconsumers into the fold.

Similarly, when Mo Ibrahim originally set out to create Celtel, Africa’s first mobile phone operator in the 1990s, the company struggled to raise capital. A traditional market analysis suggested that the mobile phone market had a limited size in Africa. But this failed to account for important business model innovations like prepaid scratch cards distributed through informal retail shops that Celtel introduced to improve affordability to its customers. By making mobile telephony affordable enough for the average African, Celtel kicked off an industry that now hosts close to one billion cell phone subscriptions and was eventually sold in 2005 for $3.4bn. It is undoubtedly worth even more to its current owners today.

A better way to estimate market potential

It’s clear that innovators can’t rely on conventional methods to analyze markets that are created out of nonconsumption; a new one is needed that doesn’t fall prey to the challenges outlined above, but that still yields accurate estimates of market potential.

In our recent research paper, we propose a five-step, “back-of-the-envelope” calculation for estimating the market size of a new business in emerging economies. The method assumes that poorer nonconsumers will be willing to spend a similar percentage of their income on a product or service as an existing consumer in a wealthier country, but our research actually shows nonconsumers will often spend a greater percentage of their income on these products and services. Let’s imagine that like Mo Ibrahim, we’re interested in creating a new market for mobile phones. First we’ll run the mobile phone industry through these steps, and then we’ll compare the results to the actual sizes of the markets in emerging economies.

Process for estimating the market for nonconsumption

Step 1. Select a few economies in which a product or service has widespread consumption, and collect data on these markets: Mobile telecommunications in Canada, Chile, Germany, Italy, South Korea, and the USA.

Step 2. Calculate the percent of income spent on consuming the solution in these economies (we used GDP per capita as a proxy). This gives you a reasonable “percent-of-income” estimate for the average consumer: 0.85% of GDP per capita.

Step 3. Approximate what a nonconsumer in an emerging market can spend on the solution using the “percent-of-income” estimate calculated in step 2: Multiply GDP per capita (row 1) by 0.85% (from step 2). See row 2 in the table below for the result for various countries.

Step 4. Estimate the number of nonconsumers in the emerging market: See row 3 in the table below for estimates in each emerging market.

Step 5. Multiply the dollars represented by the approximate percent-of-income (step 3) by the number of nonconsumers (step 4). The result is the size of the nonconsumption market:  See row 4 in the table below for estimates in each emerging market.

This methodology confirms vast opportunity for market creation in several emerging economies.  To assess its  accuracy, let’s drill down on Nigeria and compare our $1.7B estimate with the actual size of the Nigerian wireless telecom industry in 2018: $4.9B, driven by a combination of higher per capita spending than our estimate and greater wireless penetration. The fact that the actual market size proved larger than our estimate further illustrates the power of market-creating innovation to unlock massive demand that lies beneath the surface of nonconsumption.

While it’s challenging to estimate the size of markets with high levels of nonconsumption, our five-step process shows it’s not impossible. If Celtel’s prospective investors in 1998 had employed a similar analysis tool that better took into account the potential to reduce nonconsumption, they may have recognized its tremendous growth potential. With sound estimates, investors can ensure they don’t miss out on the chance to deploy innovations in emerging economies that can fuel sustainable development and attractive profits.

To learn more, see:

Avoiding the prosperity paradox: How to build economic resilience in a post-COVID world

Rich Alton is the director of emerging research at the Clayton Christensen Institute. He is responsible for training new visiting research fellows, advising them on research questions, and helping them drive their research to publication.