June 25, 2014 Marketing en_US Learn how to research and determine how consumers are spending their money. Market size has a profound impact on the success of your business. https://quickbooks.intuit.com/cas/dam/IMAGE/A60FcXIE7/b337d702e12305fd781580a8ddfc7cd7.png https://quickbooks.intuit.com/r/marketing/evaluate-market-size A small business owner's guide to evaluating market size

A small business owner's guide to evaluating market size

By April Maguire June 25, 2014

Whether you’re looking to launch a new business or expand your existing products and services, estimating market size is a crucial aspect of evaluating your company’s potential for future success. Market size refers to the number of potential buyers for a product or service in a given area. Determining your market size is a vital part of the research stage of product development.

Taking time to understand your target market segment will put you in a better position to market and sell your new product. It will also allow you to implement pricing strategies better. In this article, we’ll cover everything you need to know about market sizing. We’ll go over what market size is and strategies you can use to evaluate it. After reading this piece, you should have a better understanding of how market sizing plays a role in the lifecycle of your goods or services.

What is market sizing?

Market sizing is the most basic form of market research. To put it simply, it is determining which customers you should target when selling your goods or services. You can break market size down into two primary categories — total addressable market and target, or available market.

Addressable markets refer to the total potential audience for a product. It is the number of customers who would buy your goods or services if you were 100% successful in converting every sale.

Determining the addressable market is critical when entering a new market, as it allows you to determine whether your total market potential is significant enough to support success. For instance, let’s say the total addressable market was only 100 customers. Would you enter this market? Probably not. If it were, say, one million customers, you would likely be more willing to enter the market.

After figuring out your total addressable markets, you can hone in on your target markets. Target markets allow you to realistically evaluate your market opportunity, serving as a subset of addressable markets. You may see others refer to target markets as segmented addressable markets.

Available markets allow you to break down your targets into different categories. For instance, you can identify potential target markets by criteria like the consumer’s:

  • Age
  • Education
  • Annual salary
  • Gender
  • Location

Business owners must be realistic when evaluating target markets. Products that are too generic are likely available from multiple competitors, which will hurt a company’s ability to gain a share of the market. One of the critical components of target markets is determining whether it’s possible to achieve a market share. The target market should include buyers who are willing to purchase a good or service.

Why is market sizing important?

Market sizing is a critical component of marketing and product launches. Market sizing allows you to properly craft your marketing strategy, pricing strategy and sales strategy.

Imagine you manufacturer winter clothing. Are you going to have more success selling in Alaska or Florida? The answer is pretty self-explanatory. If you tried selling in Florida, you’d face an uphill battle. Not only would you waste considerable marketing funds, you’d have to slash prices to the point where you wouldn’t be profitable. There isn’t much market potential in that region.

This is a clear-cut example of why it’s so important to understand your target market. Now, imagine you sell a good or service, and the target market isn’t so clear-cut or easily identifiable. Investing in market research allows you to streamline and optimize the release of your new product, increasing the likelihood of success.

You can segment markets in dozens of different ways. In the example above, the geographical location was the only segment considered. But, you can consider numerous other demographics, ranging from age to family size. By honing in on your potential customer, you’ll increase the likelihood of sales and improve your bottom line.

How to evaluate market size and scope

The opportunities to define a target market are indeed endless. How can you go about doing so? Consider these four strategies to help you execute a proper market sizing campaign.

1. Determine your subsegment

Identifying your potential market is like a funnel. The total addressable market is the top of the funnel. But no business is going to convert 100% of leads. While identifying the total addressable market is critical, you should pay much more attention to your target market. Because target markets are more refined and specific, they are the narrower portion of the funnel. Zeroing in on and understanding your potential target markets will be much more helpful than wasting time on the total addressable market.

Also, remember the importance of building a brand. It may be better to be very successful in one or two target markets. Not only will you keep costs low because of your high efficiency rates, you’ll build a brand and brand credibility within a small segment. As the brand grows, so too will your market potential.

2. Know your reasonable market share

You should also be realistic in determining the potential market share available. For instance, Apple owned 41% of the 2019 Q2 market share for smartphones in the United States, while Samsung owned another 21%. If you’re a smartphone manufacturer, will you be able to seize the other 38% overnight? Absolutely not. Identify a realistic market share and work toward achieving that goal.

3. Always be evaluating

Once you begin selling to your target markets, you should continually measure your success. Start by defining a goal for market growth. Although it varies from business to business, if you seize around 5% of the total addressable market within the first few years, you’re in good shape. Remember to analyze data to see how well you track toward your goal and whether you need to adjust your marketing, pricing or sales strategies.

4. Know your competition

It’s ok to be confident in your product, but you shouldn’t be stubborn. Growth and expected market sizing are relative. For instance, there’s a lot of competition in industries like travel and hospitality.

However, if you create a product that’s brand new, there’s a higher potential for you to gain a more substantial portion of the total addressable market. Your market sizing goals should be realistic, depending on which industry you’re breaking into.

Resources for evaluating market size

Understanding your clients’ spending potential and how they shop allows you to make educated decisions about market size, increasing your chances of reaching your target audience.

Now that you have an idea of what you’re looking for when market sizing, you’re likely wondering where you can find that information for your industry. Many online resources offer reliable figures for marketing research, allowing businesses to assess their market size, analyze market trends, and determine their profit potential. These resources serve as excellent starting points to conduct primary research.

  • The Bureau of Labor Statistics is a valuable source for information about buying habits and can help calculate your consumer price index (CPI). This index measures the change in price for a given product or service over time, and it’s useful for businesses wanting to measure potential consumption for their goods as well as the amount of product they need to sell to be profitable. Knowing your CPI allows you to determine the size of the market you need to target.
  • USA.gov is an excellent resource for learning about the spending habits and purchasing power of specific demographics or geographical regions in the United States. The site gathers tons of info from U.S. federal agencies, including the Census Bureau, the IRS and the International Trade Administration. While its interface is simplistic, it has multiple search options that allow you to pinpoint the exact information you’re searching for.
  • The Small Business Administration (SBA) also provides statistics and information that can be valuable when determining your market size. In addition to general business data that can help you better understand your competitors, it also offers demographic information, consumer statistics, economic indicators, income and earning statistics, and much more. Using the SBA for market research can help you better understand your potential customers, their spending power and other data that can help narrow your market to a serviceable one.
  • Many businesses use the Bureau of Economic Analysis (BEA) to evaluate market size. The BEA offers trade and investment data along with information on consumer spending you can use to determine the viability of your business plan. Companies can also use BEA data to assess the success of their competitors in the industry and tailor their own business plans accordingly.
  • Data from Pew Internet includes information on market size so that owners can hone in on penetration strategies that could work for their industry. By reviewing the latest consumer trends, entrepreneurs can evaluate the growth of various industries over time and determine whether there’s room for their product in the marketplace.
  • Sites like Statistic Brain offer invaluable insight into how Americans are spending their money today. By learning how much money people set aside for various expenses and luxury items, companies can assess potential market size and return on investment (ROI).
  • Baker University offers various types of market research information, including population demographics, buying trends and expenditure data, to help businesses get to know their potential audiences. This can help you gauge interest in your product or service and see if people are willing to spend money on it.

If people are interested in purchasing your product and a sizeable percentage of the population hasn’t done so yet, there is a substantial opportunity for business success. On the other hand, if all your potential clients already have a similar product, it may be hard to generate sufficient interest.

Either way, you should take time to review similar products in the marketplace and make sure yours is different enough to stand out.Figure out your selling proposition or what makes you unique. Is it your price? Your customer service? The user experience? Knowing your selling proposition will allow you to determine what type of segment to target.

For instance, imagine you have a technology product that’s similar to one that’s already on the market. Your product is a bit more expensive, but you offer considerably better customer service than your competitor. Perhaps, you can target older individuals who are not as technologically-savvy as teenagers and are willing to pay more for a positive experience.

Market sizing is not a black-and-white endeavor. There are a lot of gray areas, and it takes a lot of time and research to identify the segments that will provide you with the most market value. If determining your market size and potential revenue is too overwhelming, research firms like eMarketer specialize in helping businesses decide what purchases customers are making, as well as the best ways for reaching their target consumers.

Making smart choices about market size

Before you launch a new product or business, you should do your research to determine how today’s consumers are spending their time and money. Too often, business owners make the mistake of launching a new product without conducting the proper research. Taking time to figure out who will be most interested in your goods or services will allow you to tailor your product development and marketing strategy accordingly.

There are a couple of market sizing strategies and external resources you can use to compile the necessary information. No matter which method you choose, make sure you prepare diligently. Sit down with your team to determine how you can implement your market sizing research into the lifecycle of your product.

Similarly, remember that market sizing is dynamic and always changing. Your target market at product launch may change down the line. By continually keeping market sizing in the back of your mind, you can put your company in the best position for success.

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A graduate of the Master of Professional Writing program at USC, April Maguire has served as a writer, editor and content manager. Currently, she works as a full-time freelance writer based in Los Angeles. Read more