Many companies and governments in the past twenty years or so have tended to assess export markets based upon their population size, and often this simple assessment is used as the primary reason behind an export or international market entry strategy. However in most cases it’s not the best method of selecting the most attractive market for your company to go to next. There are of course a variety of regulatory hurdles to overcome, which might prohibit entry to the market for a variety of reasons, but not withstanding these challenges the key question for many companies is “how can we use population as an indicator for international market attractiveness?”
Population can be used as a crude measure of market capacity to absorb demand for your product and or service. However, many people make the mistake of not considering the capacity of the population to pay for the product or service. Many Australian business and government leaders have advocated trade engagement with countries like China and India, based on populations of more than 1 billion people. The populations of China and India certainly have mega populations, which make Australia’s 23.5 million people look miniscule in comparison. However do the 1.1 billion people living in India have the financial capacity to buy your product or service? If they don’t, then despite the large population, there may not be real demand. This is where we need to be careful when assessing market size based upon population. Not all countries are at the same level of economic development, indeed many of the markets with the largest populations are in “our” Asian region, and are emerging economies. They have not yet reached advanced economy status as countries like Australia.
The World Bank classifies countries into a variety of economic status including Lower-Income, Middle Income (Lower-Middle and Higher-Middle) and Higher-Income economies, based on the level of Gross National Income per capita. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. This figure provides a broad understanding of the level of development as averaged across the country, but of course doesn’t account for sub-regional variances from urban to regional areas, and between different cities in a given country. As a general guide however we can use these to determine the type of product (low cost – high cost) might be more appropriate. So for example we might expect High Income economies to have a greater capacity to pay for premium food and wine products, while low income and lower-middle income economies are likely to have less capacity to pay, and might be more interested in the non-value added base level commodity.
This brings us to the point of population, and whether we should use the headline figure of total population as an indicator of market attractiveness. I generally prefer to use the adult population rather than the total population, as the generally reflect those in society with capacity to pay. This also enables us to determine populations within different wealth levels in each country. The reason this is important is that it helps us to identify the potential size of a particular market segment in a particular country. Clients often ask me “what is the ‘middle class’ population of targeted countries?” The World Bank identifies the middle class as those people earning between $10-50 per day. While other economists identify the middle class as those earning more than the poverty line figures of $2-4 a day. That is a large variance, and probably not that helpful if you are seeking to develop an international market for premium Australian products or services. This is why determining the population of varying wealth levels can be better in determining international market attractiveness.Another way of looking at capacity to pay is to look at GDP per capita, or wealth per adult, which can provide an indication of an averaged look at purchasing power across a range of countries. When we look at these figures we see that although countries like China and India have large adult populations, the averaged GDP and Wealth per capita figures are much lower than higher income economies such as Australia, Japan and Singapore. Although China has the largest adult population at just under 1 billion people, both GDP per Capita and Wealth per Adult are much lower than countries in other parts of Asia, while India is ranked towards the bottom or the table alongside Cambodia and Myanmar.
There are a variety of measures that allow us to determine populations of varying wealth levels within each country, although there is likely to be a level of fluidity in the absolute numbers, they give a good indication of the market size for premium products, based on the likely capacity to pay. The middle class figure that I like to use is “adults with wealth between US$10K and US$100K”, and it provides an interesting insight in the market attractiveness in a range of markets. China has a substantial population of 390 million, while India with comparable total population has “only” 40 million at this wealth level. Indonesia with around 1/5th the population of India has more than 27 million people with wealth between US$10K-$100K, and ASEAN which has half the population of India has a $10K-$100K wealth population of 55 million. If we look at the next wealth level of $100K-$1million we find that Japan has more than twice the population at this level than China.
Overall these numbers certainly paint a different picture of market attractiveness, particularly if your company was using the headline population figure as a reason for targeting a specific market. On these figures, and not accounting for a range of other factors that effect international market attractiveness there may well be more opportunities in markets like Japan, and ASEAN than you had previously considered. Using population as an indicator for your next international market is a useful tool, but make sure you use the best figures that are most relevant to your product or service, and in general its best to use these population figures inline with a range of other factors to determine whether there is a real and tangible market opportunity in your next international market.