how to measure

How to Measure Your Market Opportunity for Business Success

INSIDER’S GUIDE | BUILDING PRODUCT MANUFACTURERS DISTRIBUTORS, CONTRACTORS SERVICE COMPANIES

3.Geography2.Dig Deeper 4. Performance

IntroductionKnowing 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.


Introduction 5.Context Conclusion1. The Numbers Resources6. Two Measures 7.Gauge Opportunity 8.Refine

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.


3.Geography2.Dig Deeper 4. PerformanceIntroduction 5.Context Conclusion1. The Numbers Resources6. Two Measures 7.Gauge Opportunity 8.Refine

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.



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 2015. 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.


216%27%126%37%U.S. Total California New York Texas

Average Office Starts (2011-2015) Growth from 2010 Office Starts


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.



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.

$0.95$2.16$4.02$2.16California New York Texas Massachusets

Average Office Starts (2011-2015) Values in Billions and % of U.S. Total

9%

17%

9%

4%


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.



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 2013

amounted to a weak 624,000 units. Single Family Housing Starts¢Annual % Change ¢Units in Thousands

’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15

1,700

1,500

1,300

1,100

900

700

500

300

624,000units

25%

21%


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.

The federal government, mainly through

the U.S. Census Department, tracks

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.

Census’ Construction Value Put in Place

is a coincident indicator. That’s because it


* INSIDER TIP

It’s important to understand the differences between the two standard measures of construction activity.


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.

Dodge Data & Analytics’ Construction

Starts is a leading indicator. This is

because Dodge Data & Analytics, using

the same $40 million office project,

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.


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.



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.



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.


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 Nonresidential Buildings¢$10M or more ¢$5M<$10M ¢$3M<$5M ¢$1M<$3M

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Months from Construction Start

Cum

ulat

ive

% C

ompl

ete


8


the same amount of Construction Starts

from one sector to another. For instance,

if your expected market opportunity is ten

times more from a $20 million healthcare

project versus a $20 million retail project,

then healthcare’s Usage Weight is ten

(10) and retail one (1). If a $20 million

office project’s market opportunity falls

roughly in between, then its Usage Weight

is five (5), and so on. Knowledgeable

individuals within your firm can often

come up with a basic Usage Weight.

Use Factor. Use Factor is a

measurement of how much of a

specific product or products is used

in projects in each sector. Use Factor

allows you to calculate that X amount

of market opportunity is generated

for your product(s) by Y amount of

Construction Starts.

You can develop a Use Factor in various

ways, including: quantity take-offs from

building plans, either outsourced or

from projects done in-house (for bidding

projects directly or through distributors);

your company’s sales records; and bids

prepared for contractors. Greater use of

CRM software and better mining of in-

house data have made generating a Use

Factor more viable than in the past.

Existing Building Stock. A significant

share of total market opportunity for

your company may result from an

owner’s need to properly maintain and


8 repair their building(s). Replacing or

upgrading roofs, locksets, door closures,

toilet partitions, carpeting, and plumbing

fixtures are all examples of this type of

market opportunity.

Knowing the existing stock of buildings

is the best way to size this maintenance

and repair market opportunity.

Similar to understanding your market

opportunity from new construction

activity, you need to assess by sector

and geography the existing stock

buildings slated for a major addition or

renovation project. Additionally, knowing

the age of the existing stock will enable

you to factor in the length of your

product’s life cycle, i.e. how many years

before it needs to be replaced — or to

determine what portion of the existing

stock is old enough to have originally

installed products replaced with

those that are more energy efficient,

representing market opportunity.

Your market opportunity generated from

Construction Starts generally has a much

greater degree of change over time than

from the existing stock. You can measure

the change in market opportunity

for existing building stock by applying

indicators of a sector’s more general

economic health. For instance, for K-12

schools it could be the passage of local

bond initiatives, for hotels the change

in revenues per available room, and for

offices the change in vacancy rates.



The Bottom LineTo 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.




Additional Resources to Grow Your Business

To learn more about how you can grow

your business, visit www.construction.com.

Call 888-808-6169 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 www.construction.com.


For more information call: 888-808-6169or visit www.construction.com

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