3 Ways To Accurately Determine Your Market Size

Knowing your market size is critical to attracting the right customers and positioning your product. Here are the 3 ways to calculate market size.

Market Size

Market research is an important step in the development of any business, regardless of industry. It provides insights that can drive the future success of the business, including potential market size, or total number of buyers for the product or service.

Market size also determines the potential revenue that could be generated by your business and should be a major consideration in your business strategy, as well as a determining factor of the products or services that you create.

The Importance of Accurate Market Sizing

An accurate understanding of market size will provide you with a number of significant advantages that will help you keep your business growing over time. It also prevents you from discounting innovations with huge potential, like AT&T did with the cell phone.

The implication of market size for any business success includes profitability, competitive advantage, business strategy and consumer behavior trends — all of which influence your business’s path to growth.

Profitability

There are quite a few reasons market size is critical to understand – the most important being that market size tells you whether there’s a large enough group of consumers or businesses who will actually purchase your product.

Without knowing the demand for your product, you could put in both time and capital – and lose both, because the market you’re going after is too small. Even with a large number of competitors, a large market gives you a better chance of building a profitable business.

Competitive Advantage

Understanding your market size is also an important step to developing your competitive advantage. While the addressable market (all of the buyers for your product category) may be large, you can only realistically capture a small percentage of that market. This is call your available market.

Identifying the differences between these two groups can help determine the features and values that will become your competitive advantage, which will help set your product apart from similar offerings.

Business Strategy

Market size should also be considered when establishing many aspects of your business strategy. These might include pricing strategies, your go-to market approach, the development of additional products and services later, as well as hiring and raising capital to fuel growth.

Understanding your market size acts as a pillar of foundational knowledge which will make strategic decisions a lot easier, because instead of targeting “everyone”, you know you’re targeting a market with a specific size and type of customer in mind.

Consumer Behavior Trends

Regularly tracking both the addressable market and the available market allows you to see whether your industry as a whole is in a stage of growth or decline.

This evaluation can also help you to identify trends in consumer behavior that affect your business and you can get ahead of those trends to modify your existing product or launch new ones.

Ignoring consumer behavior trends can be disastrous. Just ask Kodak or Blockbuster.

Getting Your Market Size Right

Neglecting to evaluate your market size, or determining your market size incorrectly, can slow down your progress dramatically. This is particularly true when it comes to adapting for industry trends revealed by a changing market over time.

While there are thousands of brands that failed to adjust to changes in buying trends, the companies to focus on are those that pivoted to capture additional market share created by changing demand. A few that come to mind include Amazon, Netflix and Starbucks.

As Seth Godin said, “You don’t find customers for your products. You find products for your customers.”

For example, did you know that Twitter was once called Odeo and offered a podcast subscription service? The founders correctly anticipated the effect iTunes would have on the podcasting market and as a result, they launched Twitter as a microblogging service.

Despite its tumultuous performance as a public company lately, Twitter remains one of the most popular social media networks, with over 1 billion registered users.

The Process For Determining Your Market Size

Unfortunately, there’s no formula for calculating an accurate market size for your business. The right process depends on your industry, your product and your market share goals.

Used together, however, the following 3 steps will help you come up with a relatively accurate determination of your market size.

Step 1: Top-Down Approach

The top-down approach is where many businesses start in determining the size of the market. With this technique, you’ll begin by researching the addressable or total market for your product or service.

Then you’ll need to form a reasonable estimate of your portion of that market, which becomes your available market. Thorough research of the market, your industry and competitors is the key to accurate estimation.

Most industries have reports that talk about market size held by existing leaders in the space. For example, Ibisworld and Gartner are two great places to start. They publish regular reports on consumer and business markets and they’re extremely accurate.

Step 2: Bottoms-Up Analysis

A bottoms-up analysis is the next step in determining your market size. You’ll want to develop a reasonable estimate of your sales growth potential based:

  • Sales channels you intend to use (retail, online, wholesale, etc)
  • Number of locations you will sell from (number of retail stores, number of online channels, etc)
  • Revenue and growth stats from competitors (refer to the Ibisworld and Gartner reports mentioned above)

The number you come up with should be compared with the addressable market size you determined in step 1 to make sure it’s realistic and not inflated.

Step 3: Competitor Analysis

Getting a detailed understanding of your competition is critical when determining your market size.
Your available market depends significantly on the amount of direct competition you face in your industry. If you face lots of competition but their products are outdated, their customer service terrible and prices expensive, then you can position against their weaknesses and start attracting some of their customers.

On the other hand, if there are a handful of excellent competitors in your space doing lots of things right, it’s going to be harder to break into that market, so you’ll really need to dig into their customer bases and look for areas in their products that frustrate their customers. You can then position your product to start winning some of those frustrated customers over.

Conclusion

Determining your market size can help answer key questions about your business, including whether your growth goals are realistic, how you should position your product, whether your growth can be sustained via profits or whether you’ll need to raise capital, etc.

The most important thing when it comes to market size is taking the time to do your research.

You’ll never guess your exact market size, but as long as you get close enough and build up a great understanding of your competitors, the weaknesses in their products and what your potential customers are looking for, you’ll have more than enough information to move forward and create some level of sustainable growth.

Good luck!

Ellen is a wordsmith for Fieldboom. She has an obsession with helping small businesses and a passion for social media marketing.