How to Estimate Business Market Size: 5 Must-Know Steps
It is critical to calculate the size of your market and the value that market will have for your business. If you do not have data demonstrating the market size, you won’t be able to develop a practical business plan. Let’s see how you can determine your market size.
It is critical to calculate the size of your market and the value that market will have for your business. If you do not have data demonstrating the market size, you won’t be able to develop a practical business plan. Let’s see how you can determine your market size.
These 5 steps will give you the right start to estimating the market size for your business. Remember to use necessary tools like market research software when you estimate the market size.
1. Define the Market
This is the first step in estimating the market size. Do not to stray from the determined market definition through the data collection process.
You can view market size in terms of:
- TAM: Total Available Market – It refers to the combined revenue or unit volume in a specified market
- SAM: Served Available Market–This refers to the percentage or size of TAM that a company can reasonably serve based on the product, geographic constraints, and technology. SAM is generally less than TAM.
- SOM: Share of Market – SOM refers to the percentage of SAM that a particular company currently serves or plans to serve. SOM will be less than SAM except in a case of monopoly.
When you start the market sizing process, the first step should be to determine what products you should include as part of your TAM. After that, start narrowing down by geographic scope.
By doing market size analysis, you can accurately determine the market potential and the estimated available share of the market.
2. Define the Target Customer
Your target customer is the one to whom you wish to market your products or services. Your product should solve a problem that your target customer faces. In order to define your target customer, you must do two things:
- Decide who the target customer is,
- Create a clear profile of the typical target customer
3. Determine the Approach to Follow
You can choose between two basics approaches to determine market size:
- Top-down: This uses a broad market size figure and establishes the percentage that the target market represents.
- Bottom-up: This builds the TAM by totaling the main variables of the target market.
Select the approach based on the information you get from market research for business. The best approach would be to use both methods to develop market sizing estimations.
4. Determine the Penetration Rate
You can further refine the market size by assuming a penetration rate for the product category. The penetration rate is a function of the nature of the product.
If the category of the product is mission-critical or mandated through regulation, assume a high penetration rate. Assume a low rate of penetration for products with a specialized purpose.
5. Do Data Structuring & Typology
Gather important data in the form of qualitative data to gather trend information. You can collect this information through secondary market research or comments from primary research.
Once you get all the trends information, you can start structuring data by theme or group. Typology is the approach for qualitative data analysis in order to group findings into clear and well-defined categories to identify data themes.
Estimating the market size is the basic part of launching any business. By using market research survey software, you can accurately predict the market size.
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