MarketSizing
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 11, 2021
MarketSizing
The "market size" is made up of the total number of potential buyers of a product or
service within a given market, and the total revenue that these sales may generate.
It's important to calculate and understand market size for several reasons.
First, entrepreneurs and organizations can use market sizing to estimate how much
profit they could potentially earn from a new business, product or service. This helps
decision-makers to decide whether they should invest in it.
If you choose to move forward, this analysis will also help you to develop a marketing
strategy that addresses the unique needs and potential of your core market.
Market sizing can also help you to estimate the number of people that you may need to
hire before you launch a new product or service, rather than "feeling your way" as you test
your new market. If you know this from the start, you can optimize your approach to
recruitment, so that you have the right people in place when you need them.
MarketSizingMethods
There are two methods that are commonly used for market sizing:
1.TopDownMarketSizing– although the top-down method is simple, it's often
unreliable and overly optimistic. It looks at the "relevant" market size for your product or
service, and then calculates how much your organization might earn from it.
For example, imagine that your organization markets learning resources to schools.
Your research shows that there are 6,000 relevant schools in your country. You know that
the average sale per school is around $50,000, which means that your market size is $300
million.
Of course, this is an incredibly optimistic and unrealistic figure. Not every school needs
your products, and they're unlikely to purchase $50,000 worth of goods each, so it could be
a real challenge to capture even a small percentage of this market. A top-down approach
gives you inflated data, and you often can't rely on it to make good decisions.
2.Bottom-Up–This approach is often more time-consuming than top-down market
sizing, because you do all of your own market research and you don't rely solely on
generalized forecasts and trends. However, you'll get a more realistic and accurate
assessment of your market's potential.
In this article, we'll focus on how you can use a bottom-up approach to determing your
market size.
HowtoCalculateMarketSize
Follow these three steps to identify your market size:
1.DefineYourTargetMarket
To predict the size of your market, you need to know the type of person that your
product or service is best suited to. Your offering has to fulfilll a need – or solve a problem –
uniquely well for a group of people, and you need to define who these people are.
Also, think about how you can access these customers – there's no point considering
them if you can't reach them cost-effectively.
You can use market segmentation to divide your market into specific groups. This will
give you a greater understanding of each group that your product or service will appeal to,
and will enable you to tailor your offering to the specific needs of each group.
Once you've identified the different possible segments in your market, choose the ones
that you want to focus on to build your business.
Now you need to determine how large the market is for each segment you've
identified. To do this, contact business organizations, data providers, civic organizations, city
and state development offices, or regulatory agencies that handle business and commerce;
and do what you can to source a list of potential clients in your chosen segments.
Example
Your organization wants to develop point-of-sale software for mid-sized grocery stores.
But, before you invest the time and money to develop the software, you need to make sure
that the market is large enough, and that people are interested enough in your product to
buy it.
After researching online and contacting your region's business and commerce
department, you determine that there are roughly 10,000 mid-sized grocery stores in your
country, and you source a list of these stores.
2.UseMarketResearchtoAssessInterestinYourProduct
Obviously, not everyone in your target market will want to buy your product. So your
next step is to estimate realistic interest.
One way to do this is to focus on competitors who target the same group of buyers.
What is their market share? And what are their annual sales for similar products or services?
If your competitors are exclusively focused on this market, this can give you a good
estimate of potential market size. However, it can be almost impossible to source this
information if they focus on other markets as well, or if they are part of larger business
groups.
Another way to assess interest is through individual interviews, focus groups, and
surveys. Question a sufficiently large sample of people or businesses that fall within your
target market, and explain what you have to offer. The larger your sample, the better your
analysis will be.
Ask them questions like:
Does this product interest you?
What would they feel comfortable paying for it?
How likely would you be to purchase this product or a similar product within the
next two years?
It's important to draw conservative conclusions based on the feedback you get from
these focus groups or surveys. Often, people will say one thing and do another. People often
"think twice" before actually making a purchase, and this is especially true as budgets,
interests, and market conditions change.
Example
Over the course of three months, you talk to 100 randomly selected mid-sized grocery
stores, which represent one percent of your target market. You explain the idea behind the
new software, and the benefits it will provide to the store owners.
After the presentations are finished, 35 stores express a strong interest in the software,
and a willingness to buy once it's available. To be conservative, you reduce this number to
18. So, 18 percent of stores in your market will be interested in this product. Out of 10,000
possible grocery stores, this means that 1,800 could buy.
