‘What’s the size of my market?’ is a question that figures at the top of every entrepreneur’s reality check when it comes to a business idea. Few people step into a venture without trying to gauge what share of the pie they can expect to have.
Getting a better handle on the target market size is also a useful exercise for businesses that are already in operation. They can evaluate how they are doing in the light of this figure and make sure their growth is in line with potential demand.
There are different ways to approach this analysis. The level of detail used could range from intelligent guesstimating to complex number crunching. The points below provide a useful framework for businesses looking to define the shape and size of their target base.
Where are your customers?
The geographical proximity of your target customer is a key factor, especially for businesses with convenience-oriented services. For example, a dry cleaning service could define its target market to be people who live within a 10 km radius of its location. This would be based on the assumption that people who live farther away are unlikely to drive too far in the quest for a reliable remover of shirt stains.
Who are your customers?
You can get a more streamlined view of the market you are catering to by coming up with a demographic profile of your target customer. The dry cleaning service might choose to target people who live in certain communities and apartment complexes of its operating zone.
Income, type of profession, household structure, life stage…these are all factors that impact lifestyle and consequently the types of services an individual or family will seek. Generating that profile of your customer also allows you to better position your product or service.
What are customers currently spending?
Another concrete approach to pinning down your target market figure (unless you are operating in a new or niche category) is to look at actual sales of products and services similar to yours and then estimate what percentage of that you might be in a position to grab.
The dry cleaning service could explore a straightforward survey to find out the average spend per target household on laundry related services. Then, assuming that it knows approximately how many such households are there in its geography, it is easy to estimate the size of the market in rupee terms.
Since this analysis is based on actual spending patterns and not on projections, it is a little more grounded than other ways of getting to the number. Market sizing is the first and fundamental part of a viability test for a new business. Beyond that, there are other factors that will impact how well a business does.
These include current socioeconomic conditions, the competitive landscape and of course, the ability of the business to penetrate the market. However, once a business clearly defines the limits and makeup of its target market, it can feel more confident in planting its flag in that space.
For an established business, this analysis will yield insights that can be used to reshape strategy, rethink marketing, or make some other critical change to grow its share of the total pie. (Note: The 2nd edition of Small Business Marketing for Dummies by Barbara Findlay Schenck was used as a reference source for this article.)