How to Estimate Your Market Size and What Does It Mean for Your Revenue
A successful marketing strategy includes one critical element – the market size. Most businesses understand the idea of market size, but it is difficult to implement.
Many people get caught up on trying to define the market or determining boundaries until they reach the research methodology and repercussions of their studies.
Defining the market size could help resolve key questions about capital spending levels and profit and growth objectives.
Market sizing may provide a brief overview of the quantity or value possibility of a B2B potential market, which is relevant to business planning and policymaking.
The five basic stages in assessing market size have been outlined below.
6 Steps to define your market sizing and its significance for your business revenue
Here is a step-by-step guide to calculate your market size. We will also cover how estimating the market size affects your revenue.
The best approach to correctly surveying your market estimation approach is understanding the knowledge needed to address your critical questions.
The first stage in predicting market size is always to define your target audience, so it is crucial that you don’t deviate from your decided market definition during the process of data collection.
Total Available Market (TAM), Market Share, and Served Available Market (SAM), can all be used to calculate market size (SOM).
TAM represents the total profits or unit quantity in a given market. A business or shareholder will often inquire about your market size as well as TAM for a particular geographic location.
Using packaged foods as an illustration, the TAM can be computed by summing the revenues of packaged food manufacturers in a specific region or customer base.
The proportion or volume of TAM which a business can tolerably serve, depending on products, techniques, and political boundaries is referred to as the SAM.
SAM is generally less than TAM. By illustrating the same packaged food case study, when the TAM for this industry is $200 BN, the SAM for manufacturers producing flexible packaging solutions would only be a fraction of the TAM.
Finally, SOM represents the fraction of SAM which a company is currently serving or intends to serve. Other than in the particular instance of monopolization, SOM will be less than SAM.
Begin your market estimation process by deciding which product and services would be incorporated in your TAM.
Then, pinpoint by geographic scope—the United States, Latin America, Europe, and so on. Another thing to think about is the timeline.
Are you searching for historical market data or forecasts for the future? By identifying what must be there in the market sizing quantification, your business can more reliably predict market opportunity and approximate market share.
Choosing your approach
There exist two basic approaches to estimating market size — top-down and bottom-up. Your chosen approach may well be influenced by market data.
Nevertheless, in order to obtain maximum confidence in your prediction, it is important to formulate market sizing estimates using both techniques.
The top-down procedure measures the proportion of the market segment, depending on a broader market size figure.
To calculate the TAM for packaged foods, for instance, you could begin with retail revenues of food products and multiply it with a presumed packaging cost — such a 10% of the complete food value refers to the packaging cost.
Overall, a top-down method is usually quicker and more accurate. It’s excellent for verification or a rapid evaluation of size of the market, but it rarely provides the level of detail required for a genuine opportunity analysis.
The TAM is created using the bottom-up technique by adding up the primary factors of the targeted market.
Utilizing the previous food packaging instance, a researcher could sum the packaged food sales of packaging manufacturers – all packaged food, by package kinds, or by geographic location.
This strategy is normally thought to be much more precise, but it takes significantly longer to finish. As a consequence, the bottom-up procedure produces more accurate estimates as it’s less probable to incorporate non-addressable earnings or units.
If you wish to adopt an easier alternative by bypassing the above steps, you can check out this guide on how to size a market. It will give you quick and smart tips to calculate your market size potential without saying goodbye to your marketing budget.
Your selected method will determine the sources utilized to calculate the size of the market.
Secondary research, also known as desk research, looks for available data and it is the most widely used type of investigation in this sort of exercise since it is easier to acquire and thus usually less expensive.
A vast amount of data can be obtained free or at low cost by conducting general web searches. While subscription-based as well as syndicated research are a fine place to begin, there are even free sources with useful information.
Information from such sources is frequently cited in publications about businesses or goods in the market segment.
You could also look at similar details in research papers and product launches. Companies that are publicly traded are obliged to share data in analysis and shareholder reports.
Annual and quarterly findings are usually accessible on these companies’ websites or through SEC filings. In addition, trade associations frequently market research and compile industry data.
Primary research aka field research is frequently used in conjunction with secondary research. Primary research could take multiple shapes and can help you gain a wider knowledge about the market, enabling you to make more informed decisions.
In-depth phone interviews, which could be used to collect more sensitive data, are the most versatile type of primary research.
If feasible, on-site trips can also be utilized to verify or refute market sizing speculations or calculate key data on marketing trends.
This can include new tech, macroeconomic indicators, relative competitive environment or even other information relating to understanding context and specifying the market segment.
Typology of data structure
To improve your knowledge of the economy, assemble trend information, that is usually in the shape of qualitative information.
Secondary research and remarks from primary research will provide this knowledge. When looking at packaged foods, it may well be useful to assess patterns for particular food segments like dairy, meat and poultry, or beverages.
Identify trends in meat packaging which differ from those in fish, for instance. Trends in the packaging types (cans, cardboard boxes, trays, and so forth.) or fill innovation might be beneficial as well.
After gathering trend data, you can begin arranging statistics by cohorts or themes. Typology is defined as a qualitative number analysis tactic for categorizing research results so as to determine data themes.
This procedure enables researchers to quickly assess the worth of resources by comparing it to other details in the very same “grouping” or “row.” Typology also is beneficial for improving a narrative arc as the work progresses into the assessment phase and inference development.
As previously stated, it is frequently necessary to generate various estimates using diverse methods or sources. This is known as triangulation.
The trust in a market estimation method increases when numerous sources or prediction models triangulate. When the approaches differ significantly, more research is needed to minimize risk and to constrict the number of market estimation projections.
Common faults or errors frequently start immediately by failing to properly define the market segment or collecting information from untrustworthy sources.
All through the process of data collection, the market definition ought to be consistent, and the methods must be predicated on industry knowledge rather than just demographic characteristics.
Endeavor to validate each significant finding using various authored primary sources or primary research whenever possible. By verifying findings, you can build confidence in the official results by leveraging the effectiveness of different sources of information.
What is the significance of market size in your revenue?
There are multiple reasons why you must be concerned with your size of the market as well as how to determine the exact value. Here are a few of the most important reasons:
- Increasing investment: The size of the market indicates the potential of any startup company, commodity, or facility. It will be a considerably simpler investment when you can demonstrate that you also have a shot of earning money — or how much.
- Create a strong business and marketing strategy: Recognizing what your industry is, how big its market is, as well as how much funds it represents provides a strong basis for developing a strategic plan and establishing clear goals for the future.
- Plan your budget and hiring: Realizing your future growth trajectory allows you to allocate funds more precisely and recruit the right people for the job at hand.
- Utilize your R&D budget smartly by learning more about your customers, whatever they want, as well as how you might provide it.
As you can see, all of the above factors play a crucial role in affecting your income and revenues in the long term.
Determining market size serves as a critical step in developing a successful brand or introducing new products and services.
But even so, this is only the first step.
The measurement isn’t valuable much until you can also demonstrate the segment of that market which you can attain and contend for.