The Importance of Knowing your Market Size in 2021 (and How to Measure it)

Illustration by Jessica Flores via Dribbble

My product is revolutionary and unique. It’s going to sell fast.’ This is an overambitious dream of every business. When designing and launching a new product, most business owners treat their product like their baby. As a result, they fall into the trap of biasness. They fail to see whether there is a requirement for their product in the market.

Where did they go wrong?

Before turning their idea into a product, these business owners did not estimate their potential market size.

But what is ‘market size’?

Market size is the total number of potential buyers for your products and services. Let’s say you’re launching a new pair of orthopedics sandals. So, you might say that your market is ‘all American adults’ because the sandals provide superior comfort. But this is wrong because even if your product is revolutionary, you’re never going to sell it to all American adults.

This is why you need to understand your market size.

In this blog, we will explore the importance of knowing the market size and learn ways to measure it.

Let’s dive in!

Importance of Knowing your Market Size in 2021

Here are seven reasons why you should know about your market size in 2021.

#1. To know the earning potential of the product or service

When presenting a business plan to potential investors and venture capitalists, it’s essential to present the size of your relevant market. It helps investors decide how much profit they can earn from a new business, product, or service. This helps them decide whether your product is worthy of investment or not.

#2. To make sure you have an audience

Before you launch any new product or service, you have to ensure that there is an audience for the product. For example, if you’re planning to sell electronic toothbrushes for kids, you may not find a market because parents do not prefer using such toothbrushes for safety reasons.

But, if your market size is adults, you probably have an audience. Through market research, you can determine the market size and understand if you have a potential audience.

#3. To make sure that market size is big enough

For example, through research, you may find that the market size for your product is too niche and small to generate a good profit margin. Realizing this at the starting stage will help you save resources like time and money.

Alternatively, you may have thought that your market size is small, but research discovers that your product’s market size is greater than what you initially anticipated. Having such information beforehand helps you create a winning business strategy.

#4. To learn more about the customer demographics

When researching to understand the market size, you’re likely to learn and gather information about your customer demographics. You may come across their spending habits and price elasticity which helps you tweak changes in the product’s development and marketing.

For example, if the research shows that most of your potential customers use Facebook, you can invest all your resources in creating a Facebook marketing campaign. Understanding the demographics of your potential market is the key to survival in the competitive world.

#5. To remove assumptions based on personal experience

Your experience and knowledge may force you to think that you understand what your potential customers need before carrying out any research. Such assumptions can prove detrimental because your product’s market may not be what you assume. Knowledge of market size removes these assumptions.

#6. To develop a marketing strategy

Today, marketing is much more than promoting the right product, in the right place, at the right time. It’s more about addressing the unique needs of your core market. This is why you should know your market size. When you know your market size, you can develop your marketing strategy that resonates with your target audience.

#7. To determine budgets and hiring plans

Your market size can help you understand the potential trajectory of growth for your business. It helps to create a budget more accurately, and you can hire the right set of team members for tasks that lie ahead. When you know the market size, you can streamline and optimize your recruitment approach to hire only the best talent.

How to Measure the Market Size

Determining your market size is an uphill battle and takes a lot of research to decode your ideal market. Here are a few ways to measure the market size.

#1. Define your market

Defining your market is critical so that you don’t stray away from your determined market definition. When determining your market size, calculate the addressable market, serviceable available market, and the serviceable obtainable market.

 icon-angle-right Total addressable market (TAM)

These are potential customers who are likely to purchase your products and services. For example, if you’re into online education, your addressable market is American students who have access to the internet and parents ready to pay for the education.

You can find about Total Addressable Market (TAM) using the following approaches.

  • Using existing data
  • Starting from scratch
  • Using government published statistics
  • Conducting research using the internet

Measuring TAM helps you understand whether there are enough customers for your product or start-up to be worthwhile.

 icon-angle-right Serviceable available market (SAM)

You calculate and define your target audience. Your target audience is a customer who is likely to buy your products and services. The available or target market depends upon technology, product, and geographic constraints.

 icon-angle-right Serviceable obtainable market (SOM)

It determines the percentage of SAM customers you can capture. You need to consider the actual competitors and market competitiveness to understand what element of the market your product or business can capture.

#2. Determine your approach

When calculating your market size, you primarily have three approaches – the top-down approach, bottom-up approach, and value theory.

 icon-angle-right Top-down approach

It involves defining the available target market and constantly applying filters that reduce this figure to get a net estimation of the target market. It goes from general to specific and requires access to different industry figures to narrow down the size of the market. Often, you use reputable data sources to narrow down your market size.

 icon-angle-right Bottom-up approach

Rather than breaking down big numbers, you first estimate the potential sales based on where you can sell your products or the product segment in the bottom-up approach.

You then estimate the size and growth potential. This approach may not be beneficial in industries where detailed data is not available. In such scenarios, it becomes difficult to size individual segments.

In short, the top-down approach starts with the entire market and gradually narrows down, while the bottom-up approach begins with a specific segment and expands outwards.

 icon-angle-right Value theory

Value theory considers the value your product is likely to add when compared to other products available in the market. It then estimates the price a customer is willing to pay for the added value.

#3. Select sources

The approach you choose will dictate the necessary sources you need to estimate the market size. You can either focus on secondary or desk research for already existing data. By doing a simple web search, you can get important and useful information about your industry.

Subscription-based and syndicated research can also be a great source of information. Also, you can read industry reports and check whitepapers to gather more relevant data that will help you understand your market size. Also, publicly held companies have to share their investor reports and annual reports. These can be a great source of information.

Apart from the secondary research, you may have to conduct primary or field research to know your market size. Use telephone interviews and online surveys to understand your market size.

#4. Make projections about your market size

The next step is to make projections about whether your market is likely to grow or shrink in the coming years. You can make projections using historical data and analyze the market performance. Giving 2-3 years projection in your business plan helps potential investors understand that there’s a greater reason to believe in your product.

Jumping on the ‘market size’ bandwagon

Success mantra for 2021: Understanding and measuring the market size is an essential step in building a successful business and launching a new product or service. Investors show interest in companies or products whose potential revenue is not limited by the small market size.

Being realistic is one of the most important aspects of determining a market size. Over-inflated projections and market size may initially impress an investor, but they will prove determinantal in the long run.

Real market size numbers showcase the growth you can achieve over time. It also means that you’re impartial about your product or service and even your customer needs. Otherwise, you will find yourself doing business in a market that is too small to survive.

How do you measure your market size? What benefits did you notice after understanding your market size?

Share your thoughts in the comments section!

About the Author!

Priya Jain is a professional copywriter with 8 years of experience. She has an MBA and engineering degree. When she is not writing, you will find her teaching math, spending her day running behind her toddler, and trying new recipes. You can follow her on LinkedIn.

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