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Determining Market Size

Market Size 

Market size is likely the most important factor in the feasibility analysis.  Without a sufficient market size, the idea may not be able to create the amount of desired value.  Market size is generally measured in one of two manners

  1. the total number of buyers or sellers in the market, or
  2. the total value of transaction within a given market.

If you are able to identify your intended customer segments, then you may be able to identify the number of individuals who fit into those segment and add them together.

Customer Segment 1 + Customer Segment 2 = Potential Customers

This information may be sufficient to deduce that the idea is a feasible business opportunity. However, it may be the case that you need a more detailed understanding of the total value of transactions in order to determine if there is sufficient value in the idea.  For example:

  • You may need to calculate the total revenue potential in order to evaluate the feasibility of the idea. This is common in industries where the costs of entry or operations are very high.
  • You will likely need to incorporate this information into your business plan in order to attract investment capital. An investor who is reading your business plan will want to know both the number of potential customers and the total value that those customers represent.

To calculate the total market value you will need the following information:

  1. the total number of customers,
  2. the average price paid per customer, and
  3. the average number of purchases per customer.

Below we discuss methods for determining each of these values.

Calculating the Total Market Size (Value) 

Calculating market size begins with determining the number of potential customers. Calculating the market size is best introduced as a series of steps.

  • Total Potential Customers: Many market studies begin estimating the market size by starting with the total number of individuals and reducing that number based on certain characteristics or criteria of the individuals.

Example:  I want to know what the market for new baby strollers is within the United States. I research how many babies are born in the US in a year (e.g., 1 million).  I do further research and learn that 50% of these are the first and only child. If it were a second child then there may not be a need for a new stroller.  So there are 500,000 newborn, first babies each year. I learn or make a presumption based on primary research that 50% of those parents purchase a new baby stroller and the rest purchase or receive used strollers. So the market is now down to 250,000. There may be other criteria that help me narrow down the market further, but this scenario illustrates a manner of estimating the number of potential customers.

This method, often referred to as the Total Addressable Market (TAM), is more speculative than other methods of calculating the number of workers.  A better way to begin estimating the market is to calculate the total number of individuals within all of the addressable, customer segments.  The number is then adjusted for any circumstances that either add or subtract from this number.

 

Customer Segment 1 + Customer Segment 2 + (1% of individuals from non-customer segment) – (85% of total purchasers of competitors product or service with last 2 years) = Total Potential Customers in all Segments

This calculation will generally yield a much smaller number than beginning with the total number of qualified people. Importantly, you will still have to employ certain techniques to estimate the total number of individuals in the customer segment, which requires far greater access to information about your potential customers.

Note: In the following chapter, we discuss methods for obtaining consumer market statistics.

  • Average Price: The next step is to multiply the number of potential customers by the average price for the good or service.

 

Note:  The next section deals with estimating the potential price of a product or service.  The important thing to note is that, in order to estimate the market size, you will need to know the average value of the price that customers in different segments are willing to pay.  In the chapter on business strategy, you will work to position your product in a manner that allows you to achieve the greatest value (highest margin when serving the greatest number of people that yields the greatest return).

  • Sales Per Customer: Next multiply this amount by the average number of purchases by each customer.  This will yield the total market size.

Secondary Research Techniques for Calculating Market Size

There are several other well-recognized manners of estimating market size.  The most common are as follows:

  • Information from Competitors
  • If you need to know that total number of potential customers in a market segment, you may be able to use statistics from similar or competitor products or services.  Even if no similar or competitive product exists, you may be able to identify a business’ customer base as similar to your intended customer segment.
  • If similar products or services exist, you may be able to estimate market size as the value of all market transactions. In this case, your feasibility analysis turns on your ability to acquire a sufficient percentage of the market as customers so as to provided the desired type and amount of value.

Approaches to Calculating Market Size as Dollar Value 

  • Bottom-Up-Approach – This approach uses the statistics from suppliers to competitor businesses to calculate the total amount of sales by that business.  This approach requires a great deal of work because you have to obtain statistics from suppliers of all of the competitor businesses.
  • Top-Down-Approach – The top down approach is most suitable when you can easily identify the sales information from your competitors. This is most often the case when the major competitors are publicly traded companies and the information is available through public filing with the Securities and Exchange Commission.  By adding up the total sales you can estimate the total market size.

In the entrepreneurial situation, much of this information may not be available.  For example, the business may be selling an innovative product that has no sales history or comparable competitors to use as guidance on the number of potential customers or the number of purchases per customer. In that case, you should attempt to use the Total Addressable Market or Customer Segments Techniques described further above.

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