How to do Market Sizing

What is market sizing?

As the name suggests, market sizing is the process of figuring out how large a market size is for a particular product or service.

More specifically, it’s an attempt to estimate the total number of buyers in a target region for that good or service and how much revenue those buyers can generate.

Figuring out how many people are potential customers (your target market) is essential for businesses. It enables you to gauge the true potential of your business model, and using that information, you can allocate resources accordingly.

Here’s a simple market sizing example. Imagine Walmart wants to open a new store in a small town.

Understanding their market size, they can estimate the monthly revenue for the new store. That can help them determine how large the store should be and how much product to carry. Without these estimates, they could overinvest in the town, and the store might fail.

While Walmart provides an opaque example, this applies just as well to any niche market.

How to determine market size

You can get an extremely generalized estimate of your market size by doing a simple calculation.

First, what is the population size of the people in the market (or what is the market size?)?

For the Walmart example, it’s the total number of adults in the new town. For a business that sells web development services, it’s the total number of businesses in the area that could benefit from a website.

Multiply the population size by your average sale (or average expected sale) value. That’s your market potential.

Naturally, this is a high-end estimate, but it can help you determine the upper limit of your business plan’s potential.

Benefits of market sizing for businesses

At this point, the market sizing question might sound interesting, but there’s still a lot to cover. Estimating a new market size is a tricky business.

What makes it worth the effort and cost?

Implementing a market sizing approach comes with some powerful benefits. The information you gain can inform all kinds of business decisions. In particular, market sizing can help you understand demand, find customers, size up the competition, and figure out long-term market trends.

Understanding the demand for your product or service

Estimating total market demand can be tricky, but it’s invaluable. When you have a clear grasp on how popular or in-demand your offer will be, it cleans up revenue estimates.

That, in turn, gives you mathematical values to determine marketing budgets, profit margins, and all of the numbers that go into determining your bottom line.

Understanding demand empowers you to make informed decisions at every step.

Identifying target customers

Identifying target customers is useful for estimating the market size in the first place, but that’s only the beginning.

Identifying your target market can help you figure out exactly when and where to focus your marketing efforts. You have to find customers in order to sell to them, and market sizing can give you a head start on that front.

Evaluating competition

Advanced market sizing methods won’t just tell you how big your potential market currently is. It will also estimate market saturation. In other words, the research will tell you how many people have access to competing products or services.

When you combine this type of competitor analysis with other metrics like demand, you can make even cleaner business estimates. You can also get a feel for what it will take to compete with existing businesses, and you can build that into your marketing strategies early.

Determining market trends

Lastly, you can estimate market trends while you gauge the overall market for your new business line. Obviously, it’s important to know if your industry and market are likely to grow or shrink.

In either case, you can strategize around trends and think about your specific market fit. Maybe your new service is best used as a temporary means to boost business.

Maybe, it’s the future direction for the whole organization. Market trends can help you think in these terms.

How to calculate market size

Comprehensive market sizing involves a deep look at many different metrics and aspects of the target market. It’s an involved process.

Whether you perform all of the research on your own, or you outsource market sizing to specialists, you want to make sure the research hits four major areas.

Conduct market research

Market research is where you get detailed information about potential buyers. This is where you investigate closely to determine how many people in an area are likely to purchase your product or service.

This is best done by taking a look at competitors (to see how much they’re already selling things similar to your offer), direct feedback (with surveys, social media polls, and/or focus groups), and population data (like total spending in the area and household spending reports).

Analyze market data

Once you collect all of your market data, it’s time for analytics. There are a few limits to how deep you can go with your analysis, but there are a few key points to include.

First, try to get a timeline for all of your data. This helps you establish trends to see if interest and/or spending is growing or shrinking over time. Time-dependent trends are helpful in any area you want to analyze.

Second, be meticulous about variance in the data. Some data will be extremely valuable. Other groups of data won’t be as telling. Diligent reporting of variance will help you tell the difference.

Third, try to tie your metrics to monetary value. The primary goal of this research is to figure out how to allocate resources, so in any reasonable way possible, figure out the dollar value of each metric.

Calculate market size

With all of this information, you’re going to try to estimate your expected total sales. You want high and low estimates to really set the stage for your business strategy. Remember to calculate revenue and profit margins while you’re at it.

The goal here is to see the raw finances in your new market before you fully invest.

Use industry benchmarks

Lastly, you can take a deeper look by running your numbers through standardized benchmark comparisons. Cash flow forecasting, NPVs, and IRRs are examples of well-established analytics that can set benchmarks for comparison.

The industry benchmarks will also help you highlight your modeling assumptions, and you can further test the impact of those assumptions on your projections. This helps you clean up your estimation ranges and ultimately improves the value of your market sizing overall.

Potential limits of market sizing

Market sizing is a powerful tool that can help you make better business decisions while you’re still in the planning phase. But, it’s not perfect, and it’s not a magic bullet. It’s just a way to increase the amount of information you have available to inform your business decisions.

It can help to look at some of the common limitations of this analytical process.

The first limitation has to do with your assumptions. At the end of the day, you don’t know how many people will buy your stuff, and you don’t know how much they will buy when they do make a purchase. You can only guess, and regardless of how hard you try, your guess will never be perfect.

Another limitation is something that impairs any attempt to predict the future. There are always complete unknowns that you can’t anticipate. Natural disasters can reshape your market in an instant. Unexpected legislation or regulations could change the rules of your industry.

The unexpected is vast, and market sizing can’t account for it at all.

Last, and most important, is that market sizing can breed overconfidence. It’s a way to gauge potential, not a guarantee.

When market sizing data looks promising, it can be easy to get overly optimistic, and that can lead to risky investment behavior. If you keep decisions grounded, though, market sizing is on your list of useful tools that can improve your business strategy.

Use market sizing for strategic business planning

As we know by now, market sizing is a crucial step in strategic business planning that involves estimating the potential market demand for a product or service.

It provides an understanding of the size and growth potential of the market, the competition, and the market share that a company can capture.

By using market sizing, businesses can identify growth opportunities, optimize pricing, develop marketing strategies, and make informed decisions about investments and resource allocation.

By following the key steps of market sizing, businesses can make informed decisions about their products, services, and overall business strategy. Incorporating market size data into your planning process can help you stay ahead of the competition and achieve long-term success.

If you haven’t been utilizing market sizing for your business strategy, it’s time to take a closer look, and Mailchimp can help. You’ll find a long list of resources that can amplify your market sizing and many other aspects of business planning and execution.