By What Exactly is Market Sizing?
In simple terms, the entire number of prospective purchasers of a product or service inside a specific market, as well as the total income that these sales may produce, make up the market size. For a variety of reasons, it’s critical to assess and comprehend market size. Entrepreneurs and businesses may use market size to estimate how much profit a new firm, product, or service could generate. This aids decision-makers in determining whether to invest in it or not. Market sizing research will also aid businesses in developing a marketing plan that caters to the specific requirements and opportunities of their core market.
Importance of Market Sizing
- Getting money to invest: Market size is a measure of a company’s, products’, or service’s potential. It will be considerably simpler to get funding if companies, especially startups, can demonstrate that they have a high possibility of generating money and how much.
- Identifying budget and hiring strategy: Knowing the firm’s future development trajectory aids in more accurate budgeting and hiring the proper personnel for the job at hand.
- Create a marketing and commercial strategy that works: Knowing who the company’s market audience is, how big it is, and how much money it represents provides the firm a solid basis on which to develop a plan and set clear future objectives.
- Wisely utilizing the R&D budget: By better knowing who the firm’s consumers are, what they want, and how they can offer it can help them in making the most of R&D investment.
- Determine which product lines and client categories have the most growth potential.
- Helps in the validation of the Business Model hypothesis.
Constituents of Market Sizing
- Market Potential: The entire potential value of a product/service sold over a defined term, assuming 100% market share.
- Total Addressable Market: The value of a product or service sold to a certain customer segment.
- Serviceable Available Market: The entire value of a product or service that can meet a segment’s demand with a single revenue stream or channel.
- Serviceable Obtainable Market: The entire value of SAM is divided by the company’s projected percentage market share.
Two common approaches to market sizing
1.TOP-DOWN APPROACH:
A top-down method begins with a broad estimate of the entire market and then narrows it down by including information about the specific firm, target market, and assumptions about the amount of market share the firms can acquire. It’s calculated by estimating the entire market and then determining the firms’ portion of it. It involves having access to broad industry data that can then be narrowed down depending on the target demographic, region, and other variables unique to the product and business. If the firms use this approach, they will need reputable data sources for industry data.
2.BOTTOM-UP APPROACH:
Rather than starting with the large figures, this technique starts with predicting prospective sales by analyzing where the firm’s product may be marketed and the market share the firm can carve out, taking into consideration details like the size of their sales force, production capabilities, and distribution. The bottom-up approach starts with the product or service itself, determining their sales channels and how much the firms can sell in each.
Steps for estimating market size
- Define the target audience: The first step in determining market size should always be to define the target market, and it’s important that the firm sticks to that definition throughout the data collecting process.
The individual or organization for whom they address a specific problem is referred to as the target customer. To determine who the company’s target client is, they must:- Find out who their target customer is.
- Create a customer profile for a typical or projected target consumer.
- Carrying out a top-down approach: Examine the overall market for the product or service, and then calculate a reasonable market share estimate. Take, for example, the $33 billion spent by visitors on vacation rentals in the hotel business. If a firm accounted for $23.8 billion of that spend, counting the remaining $9.2 billion as competitors for the taking would be a stretch.
- Follow-ups with Bottom-up approach: Identify where the businesses sell their products, how many places will carry them, and how many similar products sell on a regular basis.
- Determine the penetration rate of firms: Assume a penetration rate for the product category to refine the market size. The nature of the product determines the penetration rate. If the product category is high consumption or mission-critical, expect a high penetration rate. For products with a specific purpose, assume a low penetration rate.
- Observe the competition: For market sizing, it is important for a firm to look at the market of their competitors to have a better understanding of where the firm stands in the market.
- Assessing the static market using data collected: When firms doing business in a stagnant market, they are up against a lot of competition. Every year, the firm and its rivals compete for the same pool of customers. For example, A new hotel firm must evaluate if the budget category is expanding faster than the luxury section when it comes to hospitality. This can help firms predict how the total addressable market size will evolve over time, which will help them adapt to trends.
Conclusion
A company can learn what they need to do to achieve the level of growth they require by going through the process of assessing market size. Market sizing is ultimately about understanding the potential of a particular market. This data is inevitable for both new brands aiming to enter a particular space or established brands looking to expand into new markets
