Let’s assume you have spent several years of your life building your business plan, executing it and bringing it up to the customers. You have Pioneering products and services, Huge brand and goodwill, your customers love what you do but it is running in loss, because you don’t have a good customer base. “If you don’t know where you are going, you’ll probably end up somewhere else” so it is very important to define your target market therefore, We’ll look at how we can analyze and break down the basics of Market Size and make our decisions accordingly.
The “Market Size” is made up of the total number of potential buyers of a product or service within a given market, and the total revenue that these sales may generate. It is generally used to estimate and calculate probable profits from the sale of goods and services and also for businesses looking to enter into a new market. It provides you with a clear view to make planes and come up with informed strategic decisions. Measuring the market size is an integral part of market analysis besides analyzing market trends, market profitability, cost structure, competition level, distribution channels and critical success factors. An important part of starting a business is market research. And an important part of market research is determining market size. If you determine your market size correctly, you’ll have a big advantage over your competitors.
Why Do Market Sizing?
There are various reasons of one being interested in Market size, it includes:
- To Gain Investments: Sizing the market is a necessary task for business and marketing planning, and budgeting for all startups, especially those that seek third-party financing such as Venture Capitals (VC). Even though their investment philosophies may differ, most VCs and Angel Investors would like to know that they are investing in a market with a large potential size. Hence, It is an indicator of the potential for any new business, product or service. If one can show that He has a good chance of making money — and how much — it’ll be much easier to secure investment.
- To Develop Marketing and Business Strategy: As a Business owner, there are some days you are tugging your hair out while racking your brain for strategies to expand your Business. Even if you do not seek external financing, understanding your market potential is essential for a range of different strategic decisions, such as for: Product Development, Selling and Distribution, Organization design, etc. One can conduct Segmentation Analysis of the current market then shortlist the sections you wish your products to reach. Estimating Market Size helps to understand the problems you solve for the customers and the potential value your product generates for them.
- To Determine Budget: Now since you have analyzed your target or potential customers through estimation of Market Size so, it helps to more accurately set aside a certain sum of money required for the Market Strategy planned above.
- Plan your Future hiring and Growth: Knowing the potential you’ve got for growing your business makes it easier to determine who you need to hire and predict when you should bring on extra employees. Effective planning will lead to faster growth and gradually, increase in the Market Size of the Business.
How to Calculate Market Size?
Do you have an amazing new product you’re ready to launch, but unsure about its sales potential? Or maybe you’re looking to project future revenues, but don’t know where to start. Your first step will be to calculate the size of your market.
The foremost thing is to analyze your “Target Market” and establish who your audience is and what characteristics they share, since NOT EVERYONE FALLS WITHIN YOUR MARKET.
We recommend you to follow these three Step Process:
- Total Achievable Market (TAM): It means the total market demand for your industry’s products or services. Put simply, it’s the maximum amount of revenue you can generate if you capture the entire market.
It answers to the question “HOW BIG IS YOUR PIE” that is
- How many people could use the product?
- How large would the markets be (in Rs.) if they all are bought?
- How many units would that be?
Here’s the way, you can Calculate TAM:
- Calculate the “Total Potential Market.”
- Add up all product sales across the Market.
- No. of Accounts in Market * Average Contract Value
- Served Available Market (SAM): SAM refers to the part of the market you can actually serve.
Factors that restrict your reach usually are:
- Geographical reach: You likely do not have a global reach, there’s always some kind of geographical barrier even if you are present digitally.
- Specialization : You may not offer all the products available in the industry, there’s always something you cannot provide.
- Production / Financial capacity: Even if everyone wanted to buy from you, you would not have the capacity to produce and sell to everyone due to productivity and financial constraints.
It answers the question “HOW MUCH CAN BE EATEN?” that is
- How many people really need/ can use the product?
- How many people have the money to buy the product?
- How many units would that be?
Here’s the way, you can Calculate SAM:
- Share of Relevant Market Offering
- Add up only relevant product sales across the market.
- Target Sector of TAM * Annual Contract Value.
- Serviceable Obtainable Market (SOM): The Serviceable Obtainable Market or Share of Market is the part of the SAM that the business can realistically serve. It helps to identify what part of SAM is most appropriate for our business model.
Factors that restrict your reach usually are:
- Linguistic barrier
- Market reach
- Production Capacity
It answers the question “HOW MUCH CAN YOU EAT?” that is
- Who are you going to sell to?
- How many customers is that?
- How large would the market be if they all are bought?
Here’s the way, you can Calculate SOM:
- Potential Share of Reachable Market.
- Divide Last year’s revenue by last year’s SAM
- Previous year’s Market Share * Current year’s SAM
What are the Approaches of Market Sizing?
There are two approaches:
- Top- Down Approach: A Top – Down estimate looks at a large, macro-economic trend within a market to narrow down and determine what percent a company can capture. It is also called the chain ratio method defining a “universe” target market and applying various filters that continually reduces the figure to an estimation of the “net” market. Put another way, the firm starts with an estimate of the overall market and then evaluates the (limited) successive proportions that it intends to reach. It can be represented by an “Inverted Pyramid” that shows a large segment at the top and the narrowed down at the bottom.
“TAM’s role in a pitch deck is to convince investors that the company is chasing an opportunity big enough to achieve venture-scale returns with the right execution.”
- Bottom – Up Approach: The bottom-up approach focuses its analysis on specific characteristics and micro attributes of an individual attribute. Its concentration is on business-by-business or sector-by-sector fundamentals. This analysis seeks to identify profitable opportunities through the idiosyncrasies of an individual’s attributes and its valuations in comparison to the market. Bottom-up analysis begins its research at the company level but does not stop there. These analyses weigh company fundamentals heavily but also look at the sector, and microeconomic factors as well. As such, bottom-up approach can be somewhat broad across an entire industry or laser-focused on identifying key attributes.
What to Choose and When?
Depending on the company, a project lead can be responsible for the work of a handful of individuals or for the oversight of multiple teams. Since different teams have different structures, sizes, and specific challenges, each project lead has to decide what management strategy will work best for them.
The top-down approach to management is one such strategy, in which the decision-making process occurs at the highest level and is then communicated to the rest of the team. This style can be applied at the project, team, or even the company level, and can be adjusted according to the particular group’s needs.
Many teams go with the top-down approach because it eliminates confusion, reduces risk, and keeps initiatives organized across larger teams. However, top-down management doesn’t work for everyone. It can limit creativity and slow down problem-solving, so it may not be the best choice for teams that require greater flexibility and responsiveness. One with multiple Sub-teams or various project parts that make processes difficult to keep organized, must go for Top – Down Methodology.
It is important to understand the business aspects that are required for the success of a business. It doesn’t really bother that How Big your Business is, at the end what matters the most is looking after the market sizing issues. For an effective working of your business, Market Sizing is the most Aspect part of it. Therefore, knowing the right market size cannot be ignored by entrepreneurs. Proper market sizing will also ensure that the right products are provided to consumers.