How To Calculate Market Potential For A Service

10 MIN READ

Marketplace Sizing

Estimating Product Potential

Make sure there are enough customers to brand your business idea viable.

Imagine that you've simply spent three years building a fantastic business – your product is keen, your website is cutting border, your people are well-trained and enthusiastic, and your customers love what you do.

The trouble is, yous're running at a loss – there merely aren't enough customers in the market to back up the business.

This is a heartbreaking, and very mutual, position to exist in. It's why many professional entrepreneurs and investors conduct "market sizing" exercises before they invest in a new business organisation.

In this commodity, we'll look at how y'all can clarify your market size, and how y'all can utilize this information to brand informed strategic decisions.

What Is Market place Sizing?

The "market size" is made up of the total number of potential buyers of a product or service within a given market, and the total revenue that these sales may generate.

Information technology's of import to calculate and empathize market size for several reasons.

First, entrepreneurs and organizations tin apply market sizing to estimate how much turn a profit they could potentially earn from a new business, product or service. This helps decision-makers to decide whether they should invest in it.

If you lot choose to motion forward, this analysis will also help y'all to develop a marketing strategy that addresses the unique needs and potential of your core market.

Market sizing tin can also aid you to estimate the number of people that y'all may need to rent earlier you launch a new product or service, rather than "feeling your manner" as yous test your new market place. If you know this from the beginning, you can optimize your approach to recruitment, so that you have the right people in place when you need them.

Market Sizing Methods

There are two methods that are commonly used for market sizing:

1. Top Down Market Sizing – although the top-down method is simple, it's often unreliable and overly optimistic. It looks at the "relevant" market size for your production or service, and and then calculates how much your organization might earn from it.

For example, imagine that your organisation markets learning resources to schools. Your research shows that there are six,000 relevant schools in your country. You know that the boilerplate sale per schoolhouse is effectually $50,000, which ways that your market size is $300 million.

Of class, this is an incredibly optimistic and unrealistic figure. Non every school needs your products, and they're unlikely to purchase $fifty,000 worth of goods each, so it could be a real challenge to capture even a small-scale percentage of this market. A top-downwards approach gives you inflated information, and yous often can't rely on it to make good decisions.

ii. Lesser-Up – This approach is often more time-consuming than height-downward market sizing, because yous practice all of your ain market place enquiry and you don't rely solely on generalized forecasts and trends. However, you'll get a more realistic and authentic assessment of your market place's potential.

In this article, we'll focus on how y'all can use a bottom-upward approach to determing your market size.

How to Calculate Market Size

Follow these three steps to place your market size:

i. Ascertain Your Target Marketplace

To predict the size of your market, you lot need to know the type of person that your product or service is best suited to. Your offer has to fulfill a need – or solve a problem – uniquely well for a group of people, and you need to define who these people are.

Besides, think about how you lot can admission these customers – there's no point considering them if you tin can't accomplish them price-effectively.

You tin can use marketplace segmentation to separate your market into specific groups. This will give yous a greater understanding of each group that your product or service will appeal to, and will enable you to tailor your offering to the specific needs of each group.

Once you've identified the different possible segments in your market, choose the ones that you lot desire to focus on to build your business organization.

Now you need to determine how large the marketplace is for each segment you've identified. To do this, contact business organizations, data providers, borough organizations, city and land development offices, or regulatory agencies that handle business and commerce; and practice what you lot can to source a list of potential clients in your chosen segments.

Example

Your organization wants to develop indicate-of-sale software for mid-sized grocery stores. Only, earlier you lot invest the time and coin to develop the software, y'all need to make certain that the market place is large enough, and that people are interested enough in your product to purchase it.

Afterwards researching online and contacting your region'south business concern and commerce department, you determine that there are roughly x,000 mid-sized grocery stores in your country, and you source a list of these stores.

2. Use Marketplace Research to Assess Interest in Your Production

Obviously, not anybody in your target market will desire to buy your product. So your next step is to estimate realistic interest.

One mode to do this is to focus on competitors who target the same group of buyers. What is their market place share? And what are their almanac sales for similar products or services?

If your competitors are exclusively focused on this market, this can give you a skillful estimate of potential market size. Even so, it tin can be nearly impossible to source this information if they focus on other markets besides, or if they are part of larger business groups.

Another manner to assess interest is through individual interviews, focus groups, and surveys. Question a sufficiently large sample of people or businesses that fall within your target market, and explain what you have to offering. The larger your sample, the better your assay volition be.

Ask them questions like:

Does this product interest you?
What would they experience comfy paying for it?
How probable would yous be to purchase this product or a similar production inside the next two years?

Information technology'south important to describe conservative conclusions based on the feedback y'all become from these focus groups or surveys. Ofttimes, people will say 1 thing and do another. People often "think twice" before actually making a buy, and this is peculiarly true as budgets, interests, and market place conditions change.

Example

Over the course of three months, you talk to 100 randomly selected mid-sized grocery stores, which represent one per centum of your target market place. You explain the idea backside the new software, and the benefits it will provide to the store owners.

Afterward the presentations are finished, 35 stores express a strong involvement in the software, and a willingness to purchase in one case it's available. To be conservative, y'all reduce this number to 18. So, 18 percentage of stores in your market volition be interested in this product. Out of 10,000 possible grocery stores, this means that one,800 could purchase.

Tip:

It volition plain accept a lot of fourth dimension to fix and conduct this blazon of inquiry. Recollect carefully nearly whatsoever other market research data you might need, and, where appropriate, gather this at the same time.

Step 3: Calculate Potential Sales

You at present have a more realistic effigy that represents how popular your product or service could exist to your target marketplace. Utilise this data to decide whether your product is worth the investment and risk.

To do this, develop a financial model of your business organization using the data you lot take gathered (see our articles on Cash Flow Forecasting and use of NPVs and IRRs for more on this.)

So, identify key assumptions within your model, and test these using techniques such equally Scenario Analysis and Monte Carlo Analysis.

Instance

You lot've determined that ane,800 grocery stores might invest in your software, which costs $30,000. If 100 pct of these stores buy the software, this would effect in a render of $54 one thousand thousand.

Your organization has already estimated that it will accept to invest at to the lowest degree $7 million to develop, examination, and market place the new software. This investment is only 13 percent of potential almanac revenues, then the take a chance is depression, even if the response isn't as positive equally predicted. Your organization therefore decides to motion forward with the development of new software.

Key Points

Your "market size" is the full number of likely buyers of your product or service inside a given market. This information tin can be especially useful to businesses and entreprenuers looking to invest in new products. Information technology tin can too support strategic conclusion making and enable you lot to create an evidence-led marketing strategy.

At that place are ii methods you lot tin use to determine your market size:

Top Downward – this looks at the "relevant" market size for your product or service, and and so calculates how much your organization might earn from it.
Lesser Upwards – you complete your own market inquiry to get a more realistic and accurate market size for your production or service.

To summate marketplace size using the bottom-up approach, follow these three steps:

Define your target market.
Apply market research to assess interest in your product.
Calculate potential sales.