As a business owner or marketing professional, you need to know how to figure out market size. There are several ways to measure market size, and the method you choose depends on your product or service. This blog post will show you 4 ways to measure market size so that you can make informed decisions about your marketing strategy.
I remember when I first started my business, I had no idea how to figure out market size. I didn’t even know where to begin! Thankfully, there are plenty of resources available now that can help businesses like mine get a handle on things like this.
How to Figure Out Market Size
There are a few ways to estimate market size. The most common is to look at the total addressable market (TAM), which is the total potential revenue from all customers in a market.
Another approach is to look at the served available market (SAM), which is the portion of the TAM that a company can realistically reach. Finally, the serviceable obtainable market (SOM) is the portion of the SAM that a company can capture.
What is Market Size?
Market size is the number of potential customers you have.
The larger the target market, the bigger the potential opportunity.
Will having a product or service that’s in demand, such as hamburgers, soda, or cell phones, mean that you’ll have a larger target audience, and therefore the potential for making larger sales?
Nope.
Your market potential is actually the potential number of customers who could be reached with your product or service, not the entire consumer population.
Let’s say you are trying to create a new kind of burger or soft drink, you might find that the market is already saturated with competition. In this case, your market share might be much smaller than you expected.
Your market potential is the total number of customers you can reach with your product or service. This also includes any current competitors, any gaps in the current market, and any geographic factors that could influence your customer base.
Why Measure Market Size?
It is important to measure the size of your market for a product or service so that you can have an estimated value of the product or service. This can help you make better business decisions.
Market size estimation can help answer questions such as:
- How many potential customers exist?
- What percentage of those customers are likely to buy?
- What price will the market bear?
- What type of marketing will be most effective?
Who Are Your Customers?
Understanding your market starts with knowing who your customers are.
To better cater to your customer base, you should gather information about their demographic, such as their age and gender. You’ll also want to learn about their buying habits, such as what types of products they’re interested in. With all of this information, you’ll be better equipped to serve them.
What Problems Do Your Customers Have — And Who is Currently Addressing Them?
Back to our soda example, we’ll illustrate how to do this in three steps:
- Identify a need. While customers do have several beverage options, some research may show that the demand for sugar-free beverages is growing, or that there’s an appetite for new, unique flavor combinations.
- Determine how many customers have an unmet need. After researching the target market, the next step is calculating how many potential customers have the same unsatisfied need. If the market for a flavor of cola is so small that it wouldn’t make sense to pursue it, then it’s better to move on to a different product.
- Know who your competitors are. Your market’s size, along with who your direct competition is, will help you decide whether you should launch, when you should launch, and how you should shape your offering. If your market is large, and there are other strong players, you may need to change your strategy to capture market share.
What is The Business Case for Your Product Offering?
Once you have identified what problems your customers want to solve, you can build up a case for your business. To do this, ask yourself two questions:
1. Who specifically has this problem?
This just means focusing on a specific segment of the market that has the issue you’re trying to solve.
2. What will be lost if this problem is not addressed?
If you ignore the market, how much revenue are you losing out on? This is where your market size and forecast come in because you can use these numbers to estimate your expected profits.
If, after considering all factors, including potential costs, you can prove that investing in a particular product/service is better than not doing so, then you’ve likely got yourself a strong argument.
How to Calculate Market Size
Now that you’ve identified your market, it’s time to figure out your market size opportunity. To do that, we suggest following these three simple steps:
1. Define your total available market (TAM)
The total demand for your product or service is the estimated number of people who want what you’re selling. For example, if you’re developing a sugar-free soft drink, that could mean estimating the demand for low-calorie soft drinks in general.
2. Define your serviceable available market (SAM)
SAM is the subset of TAM within a specific geographical or market area. For example, if you’re selling a new kind of soda, you might want to initially sell it to people who live in New York City or people who regularly use vending machines.
3. Define your serviceable obtainable market (SOM)
SOM is a subset of SAM. It will include customers who are not currently being served by your company, or who are dissatisfied with your existing product offerings.
If your new soda was available at nearly every vending machine, only people who wanted to try something new or who happened to visit a machine that didn’t have any other alternatives available would be likely to purchase your drinks.
When you define your target market in this way, it provides valuable insights into the scalability of your product. This allows you to see the full potential size of the market opportunity. By having this information, you can make decisions on how to best grow your product and business.
One way to calculate the potential size of your market is to consider the scalability of your product. This will give you an indication of how many people could potentially use your product or service, and therefore the full size of the market opportunity. Of course, you won’t be able to serve everyone in the immediate term, but with some expansion, you could reach a larger portion of the total available market.
Calculating Market Volume
Once you have an estimate of the size of your target market, you can calculate your market volume.
The volume of the market refers to the total number of possible sales that you can make during a specific period.
To calculate your market volume, you need to know your product’s penetration rate.
What is Penetration Rate?
The penetration rate is the percentage of your target market that you have reached at least once.
The formula for calculating penetration rate is:
Penetration Rate = (Number of Customers ÷ Target Market Size) × 100
Let’s say you sell sugar-free soda to gyms to stock their vending machines. In your region, there are 2,000 gyms. To date, you’ve managed to sell to 150 gyms. That means your penetration rate is 150/2000 x 100 = 7.5%.
Calculating Market Value
To calculate your market value, you’ll need to determine your market volume and average sale value. Once you have those numbers, you can multiply them together to get your total market value. For example, if you sell an average of $10,000 worth of products to 150 gyms, then your market value would be $1,500,000.
If you were to increase your market penetration to 15%, that would effectively double your market value to $3 million. This highlights how important market size is in understanding the potential for growth of your business.
Target Market Segmentation
The first stage of a strategic marketing plan is segmenting your market.
After you’ve identified your market, you can focus on those that you consider to be your primary consumers and focus the majority of your sales and marketing efforts on them.
You can also customize your marketing mix to better understand and appeal to your different market segments, making it easier to capture and serve them.
Segmentation allows you to take a diverse group of customers and break them down into smaller groups, based on similar characteristics.
Segmentation Survey
Narrowing your market is a daunting task, but there are ways to make it easier. One effective method is to use surveys to segment your market and target them more specifically.
A segmentation survey is an invaluable tool for understanding your customer base. By gathering data on factors like age, gender, household size, and geographical location, you can build up a comprehensive picture of your customers and the best ways to reach them.
Use a segmentation survey template to get started today and make sure you are making the most of your marketing efforts.
If you want to gather demographic information from your prospects, consider sending out a demographics questionnaire.
This can help to quickly build up some detailed customer profiles.
Conducting Market Research
A segmentation survey is just one way to gather information about your market.
Other types of market research, such as focus groups or interviews, can help you gauge potential interest in your product or service, as well as demand for it. This information can then be used to estimate the size of the market you have the potential to capture.
Brand Awareness Research
How well-known is your company? Your brand awareness score will give you an idea of how much business you can expect in the future.
If you are a well-known brand, you have a greater chance of reaching more people. However, if you have a lesser-known business, your chances of connecting with people will be lower.
Don’t worry if you have low brand awareness! This is an opportunity to grow through a careful marketing campaign. The first step is to do a brand awareness survey.
Transaction Data
Analyzing historical transaction data can help you better understand the size of your market. Sales volume and sales value data will be especially relevant.
This data should be collected on a yearly, quarterly, or monthly basis.
Secondary market research can provide valuable insights into the potential future size of your industry. By tracking growth trends and understanding consumer behavior, you can make informed predictions about how the market may change in the future.
This information can help you adjust your business strategy to stay ahead of the competition.
Conclusion
All in all, there is no one-size-fits-all answer to the question of how to figure out market size. The method you choose will depend on your product or service, as well as your budget and time constraints. However, all of the methods mentioned in this blog post can be helpful in one way or another. So don’t be afraid to experiment until you find the right fit for your business!
