Every business has a market. From businesses like Amazon, whose audience could be anyone, to niche businesses selling specialized, custom products, knowing your market is essential to establishing a successful business. Many organizations believe their product is so novel or useful that their market is everyone, but more often than not, the customer base will actually exclude certain demographics. If your product is extremely expensive, that means the product is probably only going to be bought by people in a certain income bracket. If your product can only be used in certain areas (like boats as opposed to cars), you’ll likely only sell that product regionally. This is why it’s important to understand your target audience and estimate your market size and type when setting up your business and marketing plans.
Market size can be simply defined as “the number of people likely to buy a product or service.” Many businesses have a rough idea of who their market is or how many individuals it might involve, but it’s important to accurately estimate market size in order to plan for things like budgets, sales goals, marketing efforts, and staffing. Knowing how large your market can be directly proportional to your business efforts. Using smart market size estimation techniques is an important planning step.
How to Evaluate Market Size?
There are several kinds of market sizing techniques that businesses should consider and use in their market size analysis. The most important step, before considering anything that will help you estimate your market, is having good data that accurately paints the picture of the marketplace or industry. Having good data and research is necessary to understanding how to estimate your market size. Before working with any market size estimation techniques, make sure you have solid information to draw from and analyze. With good data, you can:
- Look at the competition: Are you the only provider of your business or service locally? Regionally? Nationally? This will tell you a lot about the potential size of your market. If you have a lot of competition, you know you are competing with other businesses for customers, effectively reducing or limiting your potential market.
- Understand your product: Be realistic about things that will affect who will buy your product. Things like cost, usefulness, reliability, or availability will influence how many people are truly in your market.
- Understand your customer: Similar to understanding your product, you must know something about your customer when doing market size calculation. Are your customers likely to be male? That tells you something about your market. Are they likely to be college-educated? Found in cities? Make a certain salary a year? Knowing your target customer always leads to helping you estimate your market size.
Estimating your market size is an important step in establishing and growing your business, including planning budgets, forecasting goals, and creating marketing plans. In addition to being something businesses should do as they launch, it should also be reevaluated regularly as your business gains customers and recognition. Customer market size is never a static thing and can grow, change, and shrink based on anything from the economy to available technology, so always be mindful of market size for your business.
Your selected approach will dictate the necessary sources to estimate market size. Secondary research or desk research searches for existing data and is the most commonly used form of research in this type of exercise because it is quicker to obtain and therefore usually more cost effective. Through general web searching, a wealth of information can be found at little or no cost. Subscription-based or syndicated research is a great place to start, but there are also free sources that contain valuable information. Articles about companies or products in the target market will often quote data from these sources. You might also check whitepapers and product announcements for similar information. Publicly held companies are required to share information in analyst and investor reports. Quarterly and annual reports are typically available on these company websites as well as through the SEC filings. Also, trade associations will often conduct market research and aggregate industry data.
Primary research, also called field research, is often used in addition to secondary research. The primary research can take on many forms and can strengthen your understanding of the market, allowing you to make better informed assumptions. The most versatile form of primary research is in-depth telephone interviews that can be used to capture more sensitive information. If possible, on-site visits can be used to confirm or contradict market sizing estimations or determine key information on market trends, such as technology, market performance, relative competitive position or other information dealing with understanding scope and defining the target market.