Techniques of Market Sizing
Many businesses are familiar with the concept of market sizing but not all are capable to incorporate it. When we talk about volume and value, market sizing is considered a quick understanding of the potential market opportunities which is equivalent to business strategy and decision-making. Market size also helps in determining the different levels of investments and profitable growth targets in the business.
In this article, we’ll discuss what you mean by the terms market and market sizing. We’ll also talk about the importance, approaches and techniques of market sizing.
What is a market?
A market is a place through which a company facilitates the exchange of goods or services to customers. In this mechanism mainly two parties are involved:
Buyers
Sellers
Let’s have a better understanding of the word ‘market’ with the following example:
B2B – Let’s assume that you are collecting data from 5,000 users and you are selling those data to 5 companies, we can conclude that those 5 companies are the target market.
B2C – Let’s assume you are buying raw materials from 5 companies and selling the packaged product to 5,000 users, we can say that those 5,000 users are the target market.
D2C – When you are a manufacturer of the brand say Nike shoes and you are selling your final product directly to 500 end-users, then those 500 end-users are the target market.
What is market sizing?
Before we discuss the approaches and techniques of market sizing let’s first understand the term market sizing.
Market sizing is the process of evaluating the potential number of customers as well as the total revenue or sales of your product/service within a given market.
Market sizing helps in determining:
Total potential market value and volume
Products/services available in the market
Target customer profiles
Investment decisions
The main competitors
Current market trends
Market sizing is classified into 4 categories:
Market potential – Assuming 100% market share, the total potential value for a product or service at a given interval.
TAM (Total addressable market) – The total potential value of the product or service available for the company and all its competitors.
SAM (Serviceable available market) – The portion of the market that can be served by your products or services with the help of one revenue stream/channel.
SOM (Serviceable obtainable market) – The portion of the SAM that the company can capture and serve.
Importance of market sizing
Calculate the sales or profit potential of customer segments or new product markets.
Understand the target customers you are willing to serve with the products/services as per their needs.
Identify customer segments and product lines with profitable growth opportunities.
Indicates whether your product/services will be viable and whether the market is big enough to be worth investing in.
Helps validate the Business Model hypothesis.
Important to investors as it gives them an idea of the market potential for scaling and profit.
Important for early-stage entrepreneurs and startups as it helps them make strategic decisions like marketing strategy, product development, organizational design and distribution channels.
Develop pivot points and exit strategies for the future.
Identify competitive threats and develop strategic responses to the threats.
How to use market sizing?
Value – Total value of products/clients in the market
Units – Total number of products/clients in the market
Market share – Percentage of products/clients sold/acquired by your competitors vs total units/value.
Market sizing approaches
Top-down approach – In this approach, you start by looking at the market as a whole and then refine it to get an accurate market size. This type of sizing is generally performed with the help of demographical data such as company size, location, industry, age, income, human population, etc. Make sure your theory is based on a large number and work your way down from there. As per your convenience, you can now easily segment the market in the way it best suits your business.
Bottom-up approach – This approach is the exact opposite which means starting small and then working your way outward. First, identify the niche market or the micro-segment you wish to target and then anticipate the numbers till you reach an appropriate scale and finally the average price per unit.
It’s always advisable to include the price factor at the last step for both approaches. Both approaches can be used to solve the problem. Although the results might differ, the results attained will be close enough to measure a more accurate answer.
Techniques of market sizing
Some of the important techniques of market sizing are:
Analysis of the product market – Defining the target market is the first step in estimating the market size. To properly scope your market sizing approach, you need to know all the details necessary to prepare your strategic questions. Follow the market sizing model here to know more in detail.
Market sizing using StartupFlux –
Segment the market on the basis of location such as city, state, country and continent
Select a value chain for example manufacturing, operations, logistics, etc.
Select an industry
Add more information such as social statistics or the number of employees
Make a note of the number of companies in relation to the norm.
Census statistics – A lot of data is being published by public or private companies and Governments regarding the lists of registered companies, customer demographics, etc which can be used to calculate the market size.
Spending data – Analysts and research firms report numbers on how much is being spent by people/companies on products or services in a certain interval.
Market projections – Make note of the estimated growth rate of the segment to find out if it’s turning up or down. This will help you gain an idea of the market on how easy or difficult it’s for you to understand. You can get authentic data through Google search for market analysts, research and consulting firms.
The final verdict
Market sizing is a practice of constant refining where you collect maximum data, adjust assumptions, calculate the best and worst-case situations and reduce potential risks. However, its a time-consuming process, but it’s worth the investment and helps you confidently answer several questions that is required by every businesses.
Some of the important techniques you need to consider are:
Analysis of the product market
Market sizing using StartupFlux
Census statistics
Spending data
Market projections
Remember, the approaches and techniques of market sizing will help you attain vital financing and target the most profitable sections of viable markets.