2 Simple and Ingenious Ways to Let the Market Size Your Business

When you are considering a new venture, the first thing you must do is determine whether there is a valuable market for it.

The business owner estimates the size of the market for the company

Imagine going through months of hard work only to realize that there are only 100 people in the US who would potentially buy your product. Knowing this early on will enable you to make educated business decisions and decide what’s worth pursuing.Master your market research with these free templates.

Discover ways to calculate your market size and measure your exact revenue potential of the business,

There are several reasons why every business should spend time sizing up its market:

  • Help you determine whether it’s a worthy investment Let’s say you have a great idea for a product but there are currently only 100 people who will buy it. From there, you can decide whether the population size is worth the cost of manufacturing, producing, distributing, and more of your product.

  • It helps you to estimate the maximum total profit If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners and investors.

  • Who are you marketing to and what are their needs No business can be successful without marketing. Knowing the size of your market is the first step in understanding your target market and their needs.

Market Shaping Methods

top-down approach

The first is a top-down approach, in which you start by looking at the market as a whole from a bird’s eye view, then refine it to get an accurate market size. It would seem like starting with your total addressable market and filtering from there.

How to Calculate Market Size Using the Top Down Approach

market size example

Let’s say you want to start a wine company. First, you want to determine how many liquor stores there are in the United States – this helps you figure out the total market you’re in. could Sell ​​your product in principle.

After your research, you learn that there are 50,000 liquor stores in the United States. Of that total list, you want to sell only the New England region — including Massachusetts, Maine and Rhode Island.

You determine that your target market consists of the 1,000 liquor stores in the New England area. From here, you research and talk to alcohol distributors to determine about a 40% success rate for wine distribution.

Using this as an example, we’ll calculate market size using the following formula:

1,000 liquor stores x 40% = 400 liquor stores

Then, if you assume that each liquor store will result in $20,000, you can figure out the potential revenue using the following formula:

400 liquor stores x $20,000 = $8,000,000

This means that if you penetrate 40% of the total market in the New England region, you can make $8 million.

bottom-up approach

A bottom-up approach is the exact opposite – starting small and working your way out.

It seems to work by first identifying the number of units you can expect to sell, then looking at how many you anticipate selling from each buyer and finally the average price per unit.

market size example

Using the same wine example – let’s say you have recent data showing that the average price of a bottle of wine in New England is $10. A survey shows that the average consumer buys one bottle of wine a week, or 48 bottles a year. This means that the average consumer spends $480 a year on wine.

Next, you learn that the maximum number of consumers (or households) you can expect to reach in the New England area is 16,000.

As a result, the size of your market is 480 x 16,000 = $8,000,000.

It is important to note that both methods ignore the existence of competitors, customer churn rates and other factors affecting sales. With this in mind, you will want to be conservative when estimating how much market size you will win and use this as a starting point.

How to take advantage of the size of your market

You Have Your Estimated Market Size – Now What?

Market size helps your business answer the following questions:

  • How much potential revenue can we generate from this particular market? In other words, is it even worth our time and energy?

  • Is the market big enough for us to be interested in?

  • Is the market growing? are there Even then Will there be opportunities to earn income from this market in 3, 5, 10 years?

Market size is an important number to know when you’re looking for funding. Investors need to know how much money they have the potential to make from a given market. Additionally, it is important to identify whether the potential revenue you can earn exceeds your business costs.

Once you have the size of the market, you’ll also want to consider how saturated the market is already with your competitors’ products.

Ultimately, you can’t capture the total addressable market (TAM) – some of those people will choose competitors’ products over yours. So you’ll need to determine whether you have a shot at earning enough consumers from TAM to make it a worthwhile venture.

Editor’s Note: This post was originally published in April 2019 and has been updated for comprehensiveness.

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