Starting your own business is an exciting venture. But if you want your business to be successful, you've got to determine how big your market size is. Without knowing this metric, your business could be creating a product or service for which there's no demand.
According to recent data from the U.S. Census Bureau, a record number of new businesses were formed. In Australia, the number of new businesses is also increasing according to the Australian Bureau of Statistics.
An important part of starting a business is market research. And an important part of market research is determining market size. If you determine your market size correctly, you’ll have a big advantage over your competitors.
There are many misconceptions about what market size means. That’s why in this guide, we’ll explain what market size is, why it’s important, and how to define market size. We’ll also share key steps necessary to determine the market size correctly.
What Is Market Size?
Put simply, market size is the maximum total number of customers that you can expect to get over a certain time frame. Typically, this time frame is measured over the course of a year.
If you own a business, it’s important to know both market size and market value. They can show you not only how many customers you can expect to get but also how much money your business can potentially make over the course of the year.
Now that you've learned a market size definition, let's take a look at why it's important.
Why Is Market Size Important?
As mentioned earlier, knowing your market size helps you understand how many customers or sales you can get. But that’s not the only reason why market size is important.
- Secure investments. Knowing your market size and providing solid proof to potential investors on how many sales you expect to get increases your chances of actually securing that investment capital
- Determine marketing budget. It also helps you calculate more accurately how much you need to set aside for your marketing budget so you can reach those customers
- Develop marketing strategy. Once you know your market size and your marketing budget, it’s much easier to plan out your entire marketing strategy
- Plan for future hiring and growth. Knowing the potential you've got for growing your business makes it easier to determine who you need to hire and predict when you should bring on extra employees.
Market Sizing Methods
Now that we’ve covered what market size is, let’s talk about how to determine what your market size is. There are three ways to calculate it:
- top-down approach
- bottom-up approach
- value theory
Let's look at each method separately:
1. Top-Down Approach
The top-down approach to calculating market size is probably the simplest method. The downside of this approach is that it can be unreliable. This method is unreliable because it relies on what's known as the relevant market size for your product. Then it bases your potential earnings on this relevant number.
Here’s a practical market size example. Let’s say you’re launching a business that sells marketing services to local hair salons. Your preliminary research shows that there are approximately 3000 hair salons in your city. The price for your monthly retainer services is $2500. This then translates into a market size of $7,500,000.
This, in theory, sounds great. But not every hair salon will be interested in your services. On top of that, those that are interested, might not want an ongoing monthly retainer. Instead, they may opt for a one-time service.
2. Bottom Up Approach
The Bottom Up approach is more time-consuming than the top down approach. It involves specific and targeted market research and doesn’t rely on forecasts or trends. Instead, you start with your price and how many items or service packages you can realistically sell.
Going from our previous market size example, you can’t realistically serve all 3000 hair salons in your area. How many clients you can take on depends on the size of your business and the type of service you provide. For example, if you’re a solopreneur, you may only have the bandwidth to work with 3-5 clients on a retainer basis.
3. Value Theory
The last method for calculating your market size is less precise than the bottom up approach. First, focus on the value your product or service offers compared to existing solutions. Then, make a market size estimation on how much potential customers would be willing to pay for that extra value.
Sticking with our previous market size example, let’s say that your monthly marketing retainer includes not only creating strategy but also posting on social media and creating necessary graphics. Would your customers be willing to pay an extra $1000?
How to Determine Market Size
Now that you know how to calculate the market size, let’s go through all the steps involved in that process. We’ll use the bottom up approach as it’s the most reliable method out of the three to calculate your market size.
Here are the steps to follow:
1. Identify the Target Market
The first thing you need to do is to identify the target market for your offer. In other words, you need to know who would be the perfect fit for your products or services. Your offer, ideally, solves a problem or fulfills a need in the market. Who would be the people that would benefit most from it?
Here's a tutorial to help you identify your marketing plans:
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Once you've got a general idea of who they are, consider how you can reach them. After all, there's no point in saying they're the perfect fit for your offer if you've got no way of getting your product in front of them.
Consider these factors:
- where they spend their time online
- the publications they read
- what social media platforms they use
- what motivates them to buy
You can go even further by dividing them into different groups or segments to get an even better understanding of how your offer will appeal to them.
After you've got a clear picture of those different segments, choose one segment that you want to focus on in the beginning stages of building your business. Keep in mind that you can expand onto other segments you’ve identified later on, after you've solidified your strategy.
Once you’ve chosen a segment, it’s time to determine how large is the actual market in that segment. You’ll want to compile a list of potential clients and customers by using public data, any business organizations or local regulatory offices that handle the business and commerce industry.
For example, let’s say you want to develop a software that makes it easy for yoga studios to book classes online. Your research shows that there are 500 yoga studios in your city, so you compile a list with their contact information.
2. Conduct Market Research
The next part in determining market size is to conduct market research to see how much interest there is for your product. As mentioned earlier, not everyone in your target market will be interested in what you've got to offer.
But if you want to see if it’s worth developing your yoga class scheduling software, you need to know how many yoga studios would actually buy it. You could start by doing competitor research and estimating their market share. But it can be hard to get realistic data this way.
A better approach would be to speak directly to your target market either by setting up individual interviews or focus groups or conducting surveys. You could ask them:
- Would they be interested in a product like this?
- How much they would be willing to pay for it?
- Whether they would be likely to make a purchase in the next year or so.
Discover even more about how to do market research in this tutorial:
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In the example of the yoga class scheduling app, let’s say you’ve talked to 50 yoga studios. You’ve explained all the benefits that your app will provide them with. Out of those 50 studios, 15 are interested in buying it.
You decide to err on the side of caution with your market size estimations, so you’ve reduced this number to 5 which represents 10% of your target market. Out of 500 yoga studios, this means 50 yoga studios could buy your scheduling app once it’s developed.
3. Evaluate Potential Revenue
So, you’ve identified your target market and you’ve done your market research. Now is the time to evaluate your potential revenue. There are several methods to do this. For example, you could use the cash flow forecasting using one of the three approaches recommended by the Association for Financial Professionals:
- working capital approach
- bank data approach
- statistical modeling approach
Or you could opt for a simpler method and multiply the number of potential buyers with the price of your product or service.
In our yoga class scheduling software example, we’ve determined that 50 studios could buy it. The price for the software is a one-time fee of $15000. That means you’d get a return of $750,000.
Of course, you also have to account for the money you’ll have to invest to actually develop and test the software. That'll help you determine if it’s worth moving forward with the development or not.
4. What to Do If Your Market Size Is Too Small?
What if after all the research, you’ve discovered that your market size is too small? For one, it may be harder to get investments. Secondly, too small of a market size could result in making no profit at all.
If your market size is too small, you can consider going back to the drawing board and coming up with a new product or service idea. But if you’ve only considered your local area, you might want to expand beyond that. For example, the yoga class scheduling software can be sold to yoga studios across the country.
Learn More About Marketing
Do you want to learn even more about marketing your business? We've got plenty of material for you to study. Here a just a few tutorials that may help:
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The Best Source for Creative Business Templates
Once you know your market size, it’s important to start promoting your business. One of the best places to find tons of creative business assets and templates is Envato Elements. Envato Elements is a subscription-based marketplace with a compelling offer.
For a low, monthly price you get access to thousands of web themes, stock photos, social media templates, and more.
Envato Elements has the best bang for your buck, whether you’re a designer working with many clients or a business owner with many brands to promote. Thanks to the unlimited downloads, you can try out as many creative variations and designs as you need.
Free creative templates you find online might be tempting but they aren’t as robust as premium templates offered on Envato Elements.
Premium templates from Envato Elements come with unique features such as:
- plenty of customization options
- variety of layouts
- content ideas built-in
- templates for every need: from simple presentations and pitch decks to social media templates, brochures, and annual business plans, and more.
If you prefer buying templates individually, be sure to check out GraphicRiver. It's part of Envato Market, a suite of creative marketplaces catering to various creative needs.
Determine Your Market Size to Grow a Successful Business
Knowing your market size is an important part of developing your business strategy. In this article, we’ve shared tips that'll help you calculate the market size correctly. The only thing left to do now is to use these tips so you can grow a successful business. Good luck!
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