The 2 Simple & Straightforward Methods for Market Sizing Your Business

 When you’re considering a new venture, one of the first things you should do is determine whether there is a valuable market for it.

Clifford Chi

Imagine putting in months of hard work to realize that there are only 100 people in the U.S. who will potentially buy your product. Knowing this early on will enable you to make educated business decisions and decide what’s worth pursuing.

What is market sizing?

Market sizing is the process of finding how big your product's audience or revenue could be. So, market size is the total number of potential buyers for a product or service and the potential revenue reach based on that population size.

When market sizing, you're calculating customer numbers to measure the growth potential of your business.

Why is market size important?

There are several reasons why every business should spend time sizing its market:

• Market sizing helps you figure out if your product is a worthy investment. Say you have a great idea for a product but there are only 100 people who would buy it. From there, you can decide if that population size is worth the cost of manufacturing, production, distribution, and more for your product.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners as well as investors.
• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and their needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set more realistic goals, assign resources, and refine your strategies.
• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market Size vs. Market Value

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to the financial worth or estimated market capitalization of a company or industry. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Market Sizing Terms to Know

Before diving into how to figure out your market size, there are a few helpful terms you should get to know.

TAM

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base that a company could achieve if it were to capture 100% of market share.

SAM

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company's resources, capabilities, and target customers.

SOM

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

Check out this post to learn more about TAM, SAM, and SOM and how to calculate them.

Target Market

A target market is a specific group of customers, industries, or segments that a company focuses on. It's the customer segment that's most likely to show interest, purchase, and appreciate a company's products or services.

Penetration Rate

Penetration rate refers to the percentage of a target market that a company has successfully captured. It shows the level of market share reached by a company in a specific market segment or overall market.

If you're a new business, you can calculate penetration rate by dividing your total customers by the number of potential customers in the target market. Then, multiply the result by 100 to get the percentage.

Learn more about market penetration here.

Market Segmentation

Market segmentation is the process of dividing the total market into distinct groups or segments. Usually, the people in these segments have common characteristics, needs, or behaviors.

Segmenting the market can help you better understand your target customers. It can also help you tailor business strategies, like marketing, to meet specific segment needs.

Value Proposition

A value proposition is the unique benefits that a company offers to its target customers. It differentiates a company's product or service from competitors and creates value for customers.

Understanding the value proposition is crucial in market sizing. This is because it can help you find the specific customer segments that will find the most value in your offer.

Try one of these free value proposition templates to draft your value proposition.

How to Calculate Market Size

1. Start with your total addressable market.
2. Find a group of customers to focus on within that target market.
3. Figure out how many of those customers are likely to buy your product.
4. Multiply that customer number by estimated penetration rate.

While calculating market size takes only a few steps, it's a crucial process. The steps below will help you understand the potential demand and revenue opportunities for your business.

1. Start with your total addressable market.

You can calculate your TAM by multiplying the total customers in a market by the annual value per customer. But before calculating, make sure you take a look at the tips below:

• Define your product or service. While developing a product can be quick, growing a business around a product is more complex. It's important to clearly understand your product or service and how it solves a problem or meets a need in the market.
• Find your market category. Some products fall within more than one industry or market category. This is the first step that will narrow your TAM. So, think carefully about what you expect customers to compare your offer to.
• Conduct market research. Gather relevant data and information about your potential users. If you're new to market research, check out this free market research kit, with research and planning templates.
• Analyze the competition. Conduct competitive analysis to figure out the market share and unique value of your top competitors.
• Define your total addressable market. With the research and analysis you've pulled together, create a realistic TAM estimate.

2. Find a group of customers to focus on within that target market.

Dig into the tips below to quantify the top customers in your market:

• Create your ideal buyer persona. Use the Make My Persona tool to outline the characteristics, demographics, and behaviors of your ideal customers.
• Segment your target market. Start dividing your target market into distinct segments. You might base segments on factors like age, location, interests, or buying behavior.
• Continue market research. Continue collecting data and insights about each segment. This will help you understand how big each segment is, as well as their needs, preferences, pain points, and purchasing habits. Your ongoing market research might include surveys, interviews, focus groups, or analyzing existing market research.
• Set pricing for your product or service. For some products, pricing is a deciding purchase factor. So, if you haven't already, set pricing or a price range for your products.
• Assess segments of your market and prioritize. Think about each segment's size, growth potential, and competition. It's also a good idea to think about how each segment aligns with your company's capabilities and resources. In short, don't just focus on segments that offer the most attractive opportunities. Make sure they align with your strengths and needs.
• Refine your buyer personas. With your prioritized segments, take another look at your ideal customer profile. This will give you a more useful buyer persona for your marketing and sales strategies.
• Confirm your SAM with market testing. Test your target segments with a product or service pilot group, measuring their responses and feedback.

3. Figure out how many of those customers are likely to buy your product.

This step will narrow your scope more intensely on the customers who need exactly what you have to offer. These are the people who are looking for you or a clear alternative to your competitors. To quantify this group:

• Create a customer journey map. From awareness to purchase, this process can help you map out the ideal customer path. From how you expect customers to discover your products to the blockers that might keep them from clicking buy, this step is useful for market sizing and beyond. Use these customer journey templates if you're new to this process.
• Estimate conversion rates. Use historical data, industry benchmarks, or industry research to estimate conversion rates. This can help you quantify expected numbers of leads, prospects, and customers in each segment.
• Figure out buyer intent. Create a ranking or score for each segment to measure their likelihood of purchasing your product. This can help you prioritize segments with the highest conversion potential.
• Create a SOM estimate with your data. The research above will add credibility to your market size estimate. It can also help guide your growth strategies.

4. Multiply that customer number by estimated penetration rate.

To calculate penetration rate, divide the SOM you calculated above by your TAM, then multiply by 100.

Once you have a calculation for your market size, you'll want to make sure you can trust that number. Keep your market sizing current with these tips:

• Confirm your data is accurate and reliable. As you complete your research, use reliable sources such as industry reports, market studies, or government databases. Also, check to ensure the data you're referencing is up to date.
• Keep up with market growth, seasonality, industry trends, tech advancements, regulatory changes, and economic conditions. These factors can affect both market size and customer demand.
• Review and update your market size estimates regularly. Market conditions change over time. Plan regular reviews of your market size, then update your calculations with new or relevant data.

Market Sizing Methods

There are two simple methods for market sizing your business. These straightforward processes can help you use data to gauge market size.

Top Down Approach

The first is a top-down approach, in which you start by looking at the market as a whole, then refine it to get an accurate market size. That would look like starting from your total addressable market and filtering from there.

Market Sizing Example

Let's say you want to launch a wine company. First, you'd want to figure out how many liquor stores are in the United States — this helps you figure out the total market to which you could theoretically sell your product.

After your research, you discover there are 50,000 liquor stores in the United States. Of that total list, you only want to sell to the New England area — including Massachusetts, Maine, and Rhode Island.

You decide your target market includes the 1,000 liquor stores in the New England area. From here, you conduct research and speak with alcohol distributors to find there's a roughly 40% success rate for wine distribution.

Using this as an example, we'd calculate the market size using the following formula:

1,000 liquor stores x 40% = 400 liquor stores

Then, if you assume each liquor store will result in $20,000, you can figure out potential revenue using the following formula:

400 liquor stores x $20,000 = $8,000,000

This means you stand to make $8 million if you penetrate 40% of the total market in the New England area.

Bottom-Up Approach

A bottom-up approach is the exact opposite – starting small and working your way outward.

This looks like first identifying the number of units you can expect to sell then considering how many sales you anticipate from each buyer and finally the average price per unit.

Market Sizing Example

Using the same wine example – Say you found recent data showing that the average cost of a wine bottle in New England is $10. A survey shows that the average consumer buys one bottle of wine a week, or 48 bottles a year. This means that the average consumer spends $480 per year on wine.

Next, you discover that the number of consumers (or households) you can expect to reach in the New England area is 16,000.

As a result, your market size is 480 x 16,000 = $8,000,000.

It’s important to note that both methods ignore the existence of competitors, customer churn rate, and other factors that impact sales. With this in mind, you'll want to stay conservative when estimating how much of the market size you'll win and use this as a starting point.

How to Leverage Your Market Size

You've your estimated market size — now what?

Market size helps your business answer the following questions:

• How much potential revenue can we earn from this particular market? In other words, is it even worth our time and energy?
• Is the market big enough to interest us?
• Is the market growing? Will there still be opportunities to earn revenue from this market in 3, 5, 10 years?

Market size is a critical number to know when you're looking for funding. Investors are going to need to know how much money they have the potential to make from a given market. Additionally, it's vital to recognize whether the potential revenue you can make outweighs your business' costs.

Once you have market size, you'll also want to consider how saturated the market already is with your competitors' products.

Ultimately, you can't capture the total addressable market (TAM) — some of those people will choose competitors' products over yours. So you'll need to figure out whether you have a shot at earning enough consumers out of the TAM to make this a worthwhile venture.

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How to Calculate Market Size

 Calculating market size is vital if your company has ambitions to grow within its current market or expand into new markets. Without this knowledge, it’s difficult to know where your brand stands relative to competitors in your market, and whether there is potential in the market for increasing sales and market share.

So, whether you want to plan where to expand your sales, launch new products or services, enter a new market or develop a marketing strategy for a targeted audience, an understanding of your market share is the crucial starting point.

To find out how you can calculate your market size, check out our infographic below.

https://bit.ly/3TNv7hp

Market Sizing: Is There A Market Size Formula?

 

Two key questions unlock the door for the strategic plans which marketing directors have to prepare on any product or division within their company.

These are:

• Where are we going (with the product/division)?
• How are we going to get there?

In order to answer these questions, answers are needed to a host of supplementary questions and, within the “where are we going?” poser, market size is an important component. Knowledge of market size lies at the nub of strategic planning.

Market size solves these strategic questions…	By answering these specific questions…
Should we invest in this product/market? Should we increase our investment in this product/market? Should we decrease our investment in this product/market?	Is the market big enough to interest us? Is the market moving in the right direction? Is the market moving fast enough? Is the market profitable enough?

Of course, a market size calculation alone will not give the red or green light on an investment decision; other research inputs will be needed on the strengths and weaknesses, of the competition, anticipated profit margins and return on capital, etc.

Furthermore, market size calculations are of no benefit in answering the question “how will we get there?” This must be solved by qualitative research designed to show among other things, why products are chosen or rejected, how the distribution routes can be penetrated, and which large customers can be won and how?

Before the market researcher decides on the approach to assess market sizing, a decision must be taken on:

• How accurate the assessment should be;
• How fast it is needed

The cost of obtaining the data is, of course, closely linked to both these issues.

Speed vs. Accuracy Of The Market Size Calculation

The speed with which a study is required is usually self evident. A board meeting or an investment committee is likely to indicate the deadline and the researcher must decide the feasibility of being able to complete by this date.

It is the management sponsoring the study rather than the researcher who must decide on the degree of accuracy required and here common sense is a guide. It may be necessary for example, for management to know, not that a market is worth $85m annually, but simply that it is worth over $50m. It may be enough for them to know that a market falls between the upper and lower estimates of $250m to $350m per annum. Equally, there will be occasion, when high levels of precision are needed, perhaps because the investment is large within the context of the total market.

In general a wide tolerance on market sizing is permissible under the following conditions:

• When an investment is very small within the total market
• When the study is a preliminary scan of the market
• When the chief objective is to answer the question “how are we going to get there?” rather than “where are we going?”

On the other hand, high levels of accuracy are sometimes necessary where:

• The investment is large within the total market and the investor aims to achieve a significant share within it
• Market sizes from different years are needed to show a trend
• It is necessary to split out sub cells of the market which could be attractive targets.

In industrial market research it is seldom possible to state the precise accuracy of a market assessment, because methods of arriving at market size are generally subjective and not derived from statistically valid samples. Realistically, most assessments of industrial market sizing have a fairly generous tolerance; + 15 to 20 per cent is the norm, while +10 to 15 per cent is quite accurate. Researchers who claim accuracy levels of +5 per cent will in most cases be deluding themselves and their sponsors.

How To Arrive At Market Size: Getting To A Market Size Formula

Naturally, it is every researcher’s aim to obtain the greatest accuracy at the lowest cost. Unfortunately there are no firm and fixed rules for doing so. For one product the market sizing may be handed on a plate in a Business Monitor or by a trade association; in others the figures will have to be dug out, possibly by a special survey. Assuming it is necessary to assess a market size, here are some steps to consider.

Step One – A Top-Down Approach

Search all government and trade association figures. Using the Central Statistical Office’s Guide to official statistics (available from Her Majesty’s Stationery Office), the search should begin for government publications which contain the market size data. The most obvious starting point is Business Monitor but, depending on the product, it could be another government publication such as Housing & Construction Statistics, Agricultural Statistics, etc.

If it is not immediately apparent that the data are available in published form, it is worthwhile double checking by telephoning one of the government statistical departments.

A search through the Directory of British Associations (published by CBD) will identify any trade associations which could be a repository for sales or production statistics. Cooperation from a trade association, even if it does collect data, cannot be assured. Very often their terms of reference are to maintain confidentiality on all figures for the benefit of members.

Finding a published source of data from a multi client study is like striking gold for the researcher. It is quick, inexpensive and usually accurate. Nevertheless it is worthwhile carrying out a few simple cross checks since government departments (or the firms which supply the data) have been known to make some unintentional errors in their records. The publication Marketsearch from Arlington Press is a comprehensive listing of published market research reports.

The published data which the researcher finds need not necessarily be in a convenient form. However, with a little manipulation it may be possible to link to the subject of interest. There are, for example, no published figures on the market for high quality labels used on bottles of gin and whisky but the sales of spirits are so well documented they could very easily be derived.

If still unsuccessful in assessing the market size, we move on to step two.

Step Two – Looking At The Supply-Side

Build up a picture of the supply side of the market, by adding together the sales of the companies who sell within it.

The researcher is likely to need to consult a variety of sources to obtain suppliers’ sales. A starting point is Companies House where for a small search fee for each company the registrar will send a microfiche of the whole history of the report and accounts. Unfortunately The Companies Act does not require small and medium sized companies to state their turnover. Even for larger companies which have to submit turnover figures, some adjustment will be necessary. The researcher needs to strip out (often with no greater sophistication than simply making intelligent guesses) those sales which are derived from other products.

Other sources which may provide clues as to a company’s sales turnover may be found on web sites in articles in the trade press or in company’s sales literature. The references may be oblique, referring to the number of employees or productive capacity rather than sales. However they provide a position which can be refined down. With all the guesswork which is applied to this method of market size assessment, it should be clear that accuracy levels may well be hovering around the 20 to 30 per cent mark.

An option which provides a quick and often more accurate means of assessing market size than juggling turnover figures is to find someone (or preferably more than one) with an overview of the market. Insights from these market gurus help sharpen the estimates and add to the researcher’s wider appreciation of the market. Overview interviews can be sought from suppliers themselves; journalists; important distributors and companies selling raw materials or components to the suppliers.

Step Three – Building From The Bottom-Up (Demand Side)

Assessing the demand of consumers (or distributors) of a product usually requires an interview program. Buyers of products seldom publish figures which can be used as a guide to their purchases – this needs to be elicited from an interview. In the case of a narrow market sector with just a few large and medium sized customers, the researcher may well attempt a virtual census. Where there are many buyers of varying sizes the researcher may sample most of the large ones and a proportion of the medium and small ones to arrive at a picture. Whether telephone of personal interviewing is used (or even a postal survey) depends on the complexity of the data to be collected as well as its cost.

A problem often arises in surveys of demand when the sample data has to be grossed up. The basis for grossing up needs to be reliable. For example, a researcher may gross up by taking the average consumption per company (derived from the survey) and multiply by the number of companies in the market. And yet there are very few markets where we know how many companies there are. Directories are notoriously unreliable as they include double counting, omissions and the inclusion of irrelevant companies.

Another method of grossing up is to obtain employment statistics for the people employed in the industry sector of interest. These can now be used to calculate market size using the following market size calculation:

Market size formula = Total purchases by sample firms X Total people employed in sector

Of course, the above is just one example of a market size calculation that could be used to determine the likely volumes bought or sold in a given sector. In any market size calculation, there are likely to be a series of key variables (or analogues thereof) that when combined together give a sense of market size.

Market assessment can take place within existing markets or new industry sectors or new geographical markets. For many companies, the first place to look for more sales is among existing customers. Current customers have already made the ultimate gesture of approval and paid money to buy your products. A bit more persuasion and they may buy more. Also, existing customers know and trust the company sufficiently well to do business. So much so, they may give serious consideration to buying a new product or service from the company. However, every company has a product that can travel. New markets wherever they are – new countries or new segments – carry risk. Market research is a must in making all these decisions.

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