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Many businesses are familiar with the concept of market sizing but not all are capable of incorporating it effectively
Many businesses are familiar with the concept of market sizing but not all are capable of incorporating 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.
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:
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:
Market sizing is classified into 4 categories:
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.
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.
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.
Some of the important techniques of market sizing are:
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, it's a time-consuming process, but it’s worth the investment and helps you confidently answer several questions that are required by every business.
Some of the important techniques you need to consider are:
Remember, the approaches and techniques of market sizing will help you attain vital financing and target the most profitable sections of viable markets.
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