This post was most recently updated on May 27th, 2016
Figuring out how to calculate market size is a challenging task that every business owner, marketer or a startup wants to learn. You might have a great product to sell, but you don’t know if there is a quantifiable audience who would be interested to buy the product.
Most small business owners fall in the trap of assuming that everyone’s their target audience. Don’t make that mistake. Not everyone falls within your market.
What is Market Size / Market Sizing?
Market sizing is a exercising that all business owners should do on a regular basis to estimate the size of their potential audience. This helps businesses to forecast their potential sales, identify where to put the marketing efforts, and estimate profitability.
You can’t sell a house to a person who does not have the means to afford one – even through a bank’s housing loan.
A middle-income worker won’t be able to afford a fine dining restaurant on a regular basis – unless he’s saving up money for a special occasion.
Market size estimation is very important because it helps to understand the feasibility of whether to invest your time, skills and money, to market a certain product.
“Size the market, not what’s being sold.” – strategyn.com
It is one of the tools besides consumer research and competitor analysis that can show you the realistic market opportunity.
Oftentimes, we’ve seen people go in businesses based on their gut feeling. Or they do it because everyone is doing it. Or maybe, the business just seems to profitable.
It’s good to follow your passion. But if you’re passion’s not going to make you money. Don’t make a living out of it.
How to determine market size?
Market size analysis depends on a number of different factors. You may need to dig in some key market insights and data to be able to draw relevant conclusions. You would also need to get your hold on to some audience insights; this helps to filter out your core audience.
There is no market size estimation formula, but several methods that you should follow to estimate your market opportunity.
What you should be concerned with is the Total Addressable Market (TAM) when looking at market size calculation. But you can’t get 100% share of the TAM. So you need to plan on getting a considerable share of the market.
There are many different market size estimation models, and following are a few of them:
- Top-Down Approach:
- We get an estimate of the total market size through published data and reports to obtain a holistic view of the market
- Then narrow down to the Total Addressable Market (TAM)
- Bottom- Approach:
- Start with estimate potential number of customers
- Extrapolate that number to the overall market: users, frequency of consumption, price, etc.
- Demand Side Estimation:
- Assess the statistics of how many people/businesses need what you are offering to assess the total demand
- Supply Side Estimation:
- Look at all the suppliers currently in business
- Estimate their business volume and total them up to get an estimated market size
The best way is to look at the market opportunity through multiple models, and then compare each of them. If your estimations are good, you will arrive at close market size estimates from all methods.
Towards the end, take a judgement call and consolidate your learnings from all methods to arrive at a TAM.
Take a look at this infographic by B2B International, that details how and why you should size your market before jumping into business.