Whether you are an entrepreneur writing a business plan or a recognized firm seeking to introduce a new product or service, you will need to estimate the size of the market you plan to serve. Easy as it may sound, this is the trickiest and most crucial segment of building or growing a business. You can even decide if the project is worth starting or taking further at all. Here is our basic guide to market sizing to help you start right.
1. What is Market Sizing?
When you quantify your target market on the number of possible users or revenue generation potential, it is called market sizing.
2. Why Market Sizing?
- Goal Setting: You need to ascertain the magnitude of required investment and profit or revenue target for a sustained growth. Market sizing helps you with the business planning and budgeting needs here.
- Business Planning: Once you know your target, building your processes to achieve it is easier. Product/service development, organizational structuring, distribution channels & partnership building, prioritizing opportunities, and key employee skills are some key business activities market sizing leverages. This is especially helpful if you are a startup seeking investment from a Venture Capitalist (VC) or Angel Investors. A billion-dollar market is an ideal starting point to generate investor interest.
- Marketing Planning: Market sizing is a detailed analysis, including studying the ‘nature’ of market. You get an insight on upcoming trends and the key demand drivers in the industry. You are also able to foresee any budding competition
To get ‘useful’ conclusions, be ‘realistic’ all along the market study, however cruel or generous numbers may seem. You might be tempted towards optimism or pessimism, but resist. Go factually. Let’s begin now.
- Step 1: Determine the needs of your target market and how they create demand for your product or service. What problem does your offering help them solve and to what extent? Start with a statement about why your customers need your merchandise.
- Step 2: Understand your target market profile. Identify the data you need to calculate the size of your market. The information requirement will vary with industry and organization’s operations stage. For example, a financial planner’s key target audience would be married people with young children. In his/her target geography, s/he might need to know what is the: age breakup, number of families with children, distribution of household income, home market values, educational achievement & college application rates for graduating high school students, number of direct & indirect competitors, type of planning solutions individuals buy and how much they pay. Broadly, try get the market composition breakup, like the gender, ethnicity, religion, age, stage of life, profession, etc. If executed well, this study helps you get closer to accurate market sizing results.
- Step 3: Now, the golden question, how many people are you targeting? Follow top down approach to identify your ‘feasible’ market size. TAM, SAM, SOM measures help with the better defined solution. Throughout, keep dynamic and static market percentage in consideration
TAM (Total Available Market): This includes every direct or indirect consumer you plan to reach with your product/service. For instance, if you are looking to provide recruitment services, your TAM will be workforce between 22 to 55 years of age. Let's suppose this number is 100,000 and you offer your service package at $500. Your TAM is $50 mn.
SAM (Serviceable Available Market): This is that part of the TAM, which is targeted by you. In the above example, if your services are limited to a certain region/sector or by experience your serviceable market will much smaller than the total market. Let's suppose you target only C-level executives and the number is 500. Your SAM becomes $250,000.
SOM (Share of the Market): This is the subset of your SAM you will be able to realistically serve. You will know the gap between the business opportunity available and practically what portion of it you will be able to serve within a stipulated time period. The numbers here are particularly useful in the initial few years of your business. Continuing with the previous case, if you estimate that 20% of SAM is achievable, your SOM becomes $50,000. Please note that all the figures are hypothetical.
- Step 4: Identify the resources you need to get all this information. Secondary market research databases and sources, particularly a combination of library and on-line research, are the primary storehouses. Business and market sections are insightful. Sometimes Government data can provide demographics statistics by metropolitan area, county, zip code, census tract, and state. If you're searching for a very specialized info, you might need to conduct your own research.
4. Why do you need help?
Market sizing is not an exact science. With the varied business needs, changing global economic growth map, new emerging markets, and the lack of a standard/objective calculation model leading to possible analytical gaps, consulting a market analyst is highly recommended. The analysis is prolific requiring more than one estimate to average out a realistic figure. Setting a fractured or inadequate target can inflict an irreversible damage to your business’ entire life cycle. Delegate right. Get the experts on the job.
Labels: Business, Educational, Research, small business, Startups, Strategy