III. Methodology
Market Sizing and Segmentation
Business forecasts are typically based on financial metrics like revenue, expense, and assets. To project revenue, analysts multiply unit price by the volume of the unit—typically sales—associated with different market sizes and segments that they think they will reach. This helps clarify business potential and strategies.
Frame’s methodology seamlessly integrates into traditional business planning and is built on the assumption that every stage and type of business planning can and should integrate GHG impact assessment in lockstep. It does so by enhancing business planning with two additional layers of data.
First, it considers volumes beyond sales, such as units in operation, depending on the nature of emissions across the solution’s life cycle. This further tracks how the solution operates across its lifespan and how emissions are not exclusively tied to the moment of sale.
Secondly, it integrates net unit impact and associated projections. Thus, the solution and incumbent unit(s) selected for unit impact analysis should be the same in detail and type as those used in company and investor decision making, including how you target market segments. Although there will be fewer market details at earlier stages, Frame advocates that investors always use the most realistic market context for unit impact and volumes based on reasonable interpretations of the information available.
Impact assessment integrates skills in both unit impact assessment, such as life cycle analysis, and business and investment analysis. While the skills required for market sizing and segmentation analysis may not be held by the same person that analyzes unit impact, investment firms should continually build common skills across all team members in order to ensure that everyone comes with a critical eye on what achieves impact, especially as impact management comes to the forefront among portfolio companies.
Market Sizing
At the broadest level, investors start by clarifying the size of the overall market from the top down. From Total Addressable Market (TAM), the analyst seeks to narrow to the Serviceable Addressable Market (SAM), the portion of TAM that can realistically be served by a company's products and services. They then define the Serviceable Obtainable Market (SOM): the portion of the Serviceable Addressable Market (SAM) you can capture after taking into account market entry points and the speed of adoption.
The more time it takes for a solution to reach scale or begin scaling, the smaller the cumulative GHG impact is, in theory. SOM factors in this volume curve—usually an S-shape—as a function of competition, regulation, resources, market theory, and more. SOM should eventually overlap with SAM.
Market Segmentation
Within any broad market, there are many market segments. These non-mutually exclusive categories offer ways to slice and dice data to reveal patterns in unit volumes and unit impact. Some broad market segments can be seen from top-down, while others require granular or bottom-up analysis tied to a company’s strategic decisions.
Both unit impact and volumes vary by market segment, and a company's market focuses and associated impacts in those areas can significantly affect overall GHG impact. Different segments thus require separate and corresponding unit impacts and volumes. In other words, for any market segment you consider, you should also quantify GHG impact and treat unit impact with the same level of detail that you treat volumes by market segment.
Below, we share examples of factors that influence unit impact during market segmentation. Accordingly, they can lead to unique and/or multiple GHG impact values.
Geography
Assessments may differ by region, due to varying local market dynamics, regulatory environments, natural conditions, and customer preferences. Examples of key considerations include:
Grid intensity: The feasibility and impact of solutions can vary significantly depending on grid intensity. For example, an electric vehicle may have a higher impact in a region with a cleaner grid compared to one with a coal-dominated energy mix.
Resource availability: Resources vary by region, such as the presence of materials that affect the way in which you make the solution and how energy can be produced. For example, solar solutions are more effective in sunnier regions, while wind solutions might be better suited for windy areas.
Temperature dynamics: The GHG impact of products like furnaces and air conditioners will differ based on climate. Cold climates demand more heating, while warm climates require more cooling, affecting overall emissions.
Different Incumbents
Different markets may have different incumbents. For example, a heat pump may replace both natural gas furnaces and electric baseboard heaters. Similarly, an electric vehicle (EV) might replace both gasoline-powered cars and hybrid vehicles, each with distinct emissions profiles.
Usage Profiles
Many climate solutions have distinct usage profiles, or ways of being used, depending on duration, intensity, or frequency of use. For example, an electric truck might be used both as a personal vehicle and within commercial fleets. Personal use might involve shorter, less frequent trips, while commercial fleet use could mean longer, more frequent journeys with higher loads.
Product Variations
Products can vary by size, how they are packaged to be sold—such as standard and deluxe product—and other important configurations. For instance, a standard model might appeal to cost-conscious consumers, while a deluxe version might target premium segments with higher performance expectations.