How To Accurately Determine Your Market Size And Boost Your Potential
Knowing your market size is one of the most important components of any strategic marketing plan. Determining the size of your target market allows you to assess opportunities, plan R&D and marketing budgets accurately, and understand the level of growth you’ll need to achieve your business goals.
Calculating market size tells you whether there is a real need for your product and is essential to bringing an idea to market. For start-ups, you can bet any investor will want to know this critical metric to judge potential revenues and weigh whether or not to partner with you. Even for established businesses, market sizing periodically helps to keep track of fluctuations in the market and allows you to alter strategy accordingly.
What Is Market Size?
The Alexa Blog defines market size as “the number of individuals in a certain market segment who are potential buyers.” Often, the market size definition includes a period of time, usually one year. Serial entrepreneur and top-10 iTunes podcaster, Stever Robbins adds that one mistake entrepreneurs often make when learning how to calculate market size is thinking it’s a demographic. Demographics help estimate market size since companies need to know their target audiences.
When researching market size, here are a few good questions to ask yourself:
- What is the time period you are looking at? One year is standard, but you might have a time frame that better suits your business. It may also be helpful to include market size for three years out. This could help a business both plan and show growth to an investor. It is difficult to determine accurate projects beyond three years.
- What geography does your market cover? Are you a local, regional, national, or global business? Are you national but choosing to launch in one region first?
- Are there special issues that need to be factored in such as regulations or buying seasons?
- Has your market been changing within the past couple of years? How do you foresee it changing within the next few years? Markets are rarely static. They evolve, so being able to foresee new technologies or changing consumer habits is important.
Why Determining Market Size Is Important
Market size is imperative for determining any product or company’s market potential. It’s how a company can best position itself to take advantage of market opportunities. Using market size and the share of that market you hope to attain will lead to developing better pricing, distribution, and marketing strategies. Knowing market size can help companies find that competitive niche or sweet spot through which they can develop a loyal following.
Estimating market size also circumvents the mindset of many entrepreneurs who are too close to their ‘baby’. Their bias can potentially lead to overestimating their market, which could cost them dearly. Determining market size also requires objectivity. Doing the math is a necessary step in figuring out an idea or product’s actual potential or investment risk.
Methods for How to Calculate Market Size
The goal of calculating market size is to figure out the addressable market (total market size) versus the available market (the portion of the addressable market in which you can compete). This is not only based on the total number of consumers but how often a product is purchased.
For instance, the total number of American consumers of shampoo is nearly everyone; it’s a product that is purchased repeatedly throughout any given year. Compare this to the total number of American consumers who purchase cars. While the majority of Americans own a car, perhaps even two, this is something that is purchased far less often than shampoo.
There are several methods for how to estimate market size. The method chosen is most likely based on what market information is available. If possible, it’s best to employ more than one method to see if each assessment is close to one another.
Top Down Approach
A top down approach starts with an estimate of the total market as a whole and then reduces it using information about the specific business, target market, and assumptions of what percentage of market share you can capture. It is calculated by determining the total market, then estimating your share of that market. It goes from the general to the specific and requires having access to broad industry figures that can then be narrowed down based on your target audience, geography, and other metrics specific to your product and business. Reputable data sources for industry figures are a must if using this method.
Bottom Up Approach
Instead of starting with breaking down big numbers, this method begins by estimating potential sales by evaluating where your product can be sold and the share you can carve out, taking into account specifics such as the size of your sales force, manufacturing capabilities, and distribution. The bottom up method is based first on the product or service itself, figuring out what your sales channels are and how much you can sell in each channel.
To summarize, the top down method starts with the entire market and narrows down, while the bottom up method begins with the specific business and expands outward.
Is There a Preferred Method for How to Do Market Sizing?
The method you choose for market sizing depends on your specific needs and the information available to you.
The top down approach requires accurate industry data. This data can be acquired in several ways. If you have a budget, the fastest route is to purchase industry-specific reports from market research companies such as MarketResearch.com or IBISWorld. Government agencies such as the Small Business Association (SBA) also have data that can be mined, as do general trade organizations like the Chambers of Commerce or trade-specific organizations like the National Restaurant Association. In addition, census and labor bureau websites track data that can be used.
It is generally thought that if you can access industry information, top down forecasting is faster because you don’t need to worry about business specifics. Furthermore, the industry data could provide insight into whether a market is growing or declining.
Many experts think that the bottom up method for determining market size yields more realistic results because the figures are based on the actual sales and marketing data for your company. This could allow companies to make better strategic decisions as they grow.
Neither method is necessarily better than the other. If you can find your market size using both methods and discover your numbers are similar, you’ll be in a very good position.
Combination of Top Down & Bottom Up
There is a method that combines both top down and bottom up. A company can aggregate the sales data of competitors and use industry forecasts together with company data usually used in the bottom up approach to come up with the market size and share. The advantages of this combination are that it addresses a company’s specific business information and puts it within the context of the whole addressable market. The trick is to accurately determine competitor sales.
Value Theory: Buyer’s Willingness to Pay
There are some businesses and industries in which the products and services do not have an exact price. Examples of this might be buying real estate or the wholesale market. In both of these examples, there is a negotiation process in which a final price is agreed upon. In these cases, determining market size might be dependent on industry averages.
A real estate company might not know in advance how many houses it will represent or at what value. Therefore, that business might have to rely on an averaging of past performance by competitors and demographic information on housing values in the region. In a very competitive environment, wholesale prices might fluctuate depending upon quantity buying or fierce negotiating between competitors. These types of companies need to estimate consumer demand and consumer valuation of products and services.
The Value of Market Sizing
Estimating market size is not simply an exercise completed to add to a presentation or business plan. Although your presentation and business plan can lead to that big sale or investor, it is also a realistic way to determine a company’s current and future markets and how much of that market can be successfully reached and converted. It is an important metric vital to the ongoing health and viability of a company.
No company can command 100% of any market. However, by going through the process of assessing market size, a company learns about what they must do to achieve the level of growth they need. Market size calculations can be used in conjunction with other metrics such as a SWOT analysis and competitor analysis to shape your marketing and sales strategies.
Deborah was the kid who would rather write book reports and essays than play ball during recess. Although she didn’t score many points with her peers, it did lead to her career creating content for TV, radio, print and new media for companies as varied as Dooney& Bourke, Panera Breads, Visa, SUNY Ulster and Hudson Valley Federal Savings Bank.
She is also a principal of small packages – a digital design company, and past partner/marketing director of whatis.com, the world’s foremost reference on information technology. And, her love of food enabled her to become a contributing editor of both Gourmet Retailer and Food Distribution Magazines.
Deborah has a bachelor degree in fine art from the Hartford Art School, University of Hartford and a masters in higher education administration from Stony Brook University. When she’s not writing, her love of quilting, furry animals, friends, and family sustains her.