October 22, 2019

How to Calculate Market Size as a Scale-up

Got an awesome product you’re ready to bring to market? You’ll need to do your homework, and that means learning how to calculate your market size potential. But conducting an in-depth market segmentation or sizing study costs loads of money and takes true research expertise. Here’s how to get a solid steer on your potential market size without saying goodbye to your [entire] marketing budget. Hint: we can help.

What is market size?

Market size is the number of individuals in a certain market who are potential customers of your product or service. Depending on your distribution strategy, you’ll probably also want to look at the number of potential sellers of your product or service, too (i.e. if you’re manufacturing gymwear, how many sports retailers are there who might stock your products?). 

These calculations help you understand the size of the opportunity in any given market. That said, it’s also important to consider other factors such as the incumbent competition. Is there a gap in the market that your product or service is going to fill?

Why is market size important?

If you produce a business plan that doesn’t cover market size, you’re likely to be sent packing by any potential investors or money lenders. Without this data you can’t create a viable business plan, because it’s the only thing that gives you an idea of the potential value of your product or service. And this is essential even if you’re not seeking third-party funding.

Let’s say you have the patent to a revolutionary new kitchen device; it’s easy to assume everyone will want one. So you might say, “my market is all British adults”, but this is naive. You’ll never sell your product to all British adults, no matter how great the product is! 

There will be a certain type of person who really does want to buy your device and your job is to nail down who that person is – and then work out how many of those individuals there are in the market. This might sound difficult, but thanks to the wealth of data tools available nowadays, it’s easier than you think.

So, let’s get started. How to define your target audience:

Your target customers are the people for whom your product or service solves a specific problem. Identifying who these people are is a lot easier if you’re already active in one market. Examine the profiles of your existing customers – what do you know about them? In addition to looking at demographic information like age, gender, geographical location and socio-economic background, engage in a conversation with your customers to find out why they buy your product and why they buy it from you specifically.

If you’re starting from scratch with a new product or service, you’ll need to come up with some hypotheses to test. For example, let’s say you’ve invented a wearable device that automatically tracks how many calories you’ve consumed. You can probably assume it will be of interest to men and women trying to lose weight, as well as sportspeople who need control over their diets. There could be further demand from employers or health insurance providers who want to incentivise people to maintain a healthy diet.   

You can gather initial data from a bit of desk research – for example, this government-published statistic tells us that 62% of adults in the UK are overweight. But don’t stop there, now’s the time to delve a bit further by carrying out some consumer research. Through a tool like Attest, you can access more than 100 million people in 80 different countries, which means you can test real demand with a subset of your target audience.

For example, you could find out:

  • How many people are actively trying to control their weight? 
  • Why is losing weight important to them?
  • What are their pain points when trying to do this?
  • What products do they currently use to help them control their weight?
  • Would they be interested in your product?
  • How likely would they be to buy it?
  • How much would they be willing to spend if they are interested?

To further define your target customer, you can then analyse their demographics (these are baked-in to the Attest platform) and look for trends. Perhaps you see that professional women, living in London and the south east, aged between 30 to 50 are showing the highest purchase intent. You can create profiles of your prime potential customers.

Once you’ve got a good indication of who your product or service is relevant to, a larger market segmentation exercise makes sense – it’ll help you prioritise your efforts and understand the true potential size of the market. 

Gathering wider market size intel:

To get the full picture, you’ll want to enhance your findings by gathering further facts and stats on your industry. Most industries have formal associations which compile and track industry size data. You can find out, for example, how much the industry is worth, how much is spent annually on specific product types and average retail prices. 

It’s worth spending some time working out which industry your product or service actually sits in. While this may seem obvious, it’s not always what you think. For example, the Chairman of Rolex stated that ‘you don’t buy a Rolex to tell the time’. The company does not sit primarily in the watch industry, but in the luxury industry, he said. Knowing your industry helps you understand who your competition really is. Let’s face it, Rolex doesn’t need to worry about Swatch even though they both produce the same product. 

To get more clarity on who your competitors are, try drawing up a market map. Market mapping involves arranging competing products on an axis according to their positioning. For example, whether they are high or low cost or whether they are complex or basic (see below example). 

In an ideal world, you’ll find through market mapping that your product falls into a unique niche. For example, it’s the highest quality product being offered at a low price point. This immediately gives you a point of difference, giving investors a compelling reason to believe you’ll be able to steal market share.

You can use your consumer research to back up your market positioning, like social enterprise Divine Chocolate did. The chocolate bar maker identified that some consumers were prepared to pay a premium price for very high quality chocolate made from Fairtrade cocoa. It saw that there was little competition in this space and successfully claimed the position. 

If you do find a gap in the market, it’s important to be sure there isn’t a reason others aren’t filling it. It may be that the demand from consumers just isn’t there, so be sure to combine your study of the market with actual feedback from consumers

Estimating total demand:

Your consumer research should have given you a good idea of the number of potential buyers of your product or service. People with a stated interest in buying are known as the ‘potential market’. But not all of these people may be able to buy. This is either because they can’t afford the product or they cannot access it. 

Thinking about how potential customers will shop for your product or service at the outset is vital. What is your distribution strategy? Do you plan to be stocked in supermarkets or in high street stores – which ones, how many are there in which locations and how likely are you to get stocked? Will you instead operate online as a direct-to-consumer brand, or sell through marketplaces like Amazon? What are your plans for fulfilment and delivery – will there be parts of the country you can’t serve?

Let’s say you plan to be stocked in independent food stores, but you find there are few of these types of outlets in the Midlands – a location where you see high purchase intent. That will affect these consumers’ ability to buy and will reduce your potential sales. You have to take these factors into consideration and look at the ‘available market’. The available market is those who have both interest and the ability to buy.

Once you have this figure, you need to multiply it by the quantity of your product an average buyer will purchase in a given time period, like a year. In the case of our fictional calorie counting device, this is likely to be a one-off purchase, but if it’s a consumable you’re selling, purchase frequency will be far higher. Use your industry data and consumer research to estimate this figure – and be realistic! Let’s say your product is a face wash for people with acne – you can reasonably expect people to get through one tube of it per month. 

Here’s a simple market size formula: if there are 500,000 target customers in your market, this means the total volume of market demand for acne face wash is 500,000 x 12 (months a year) = 6 million a year. If the average price of acne face wash is £10 a tube, then market value is 6 million x £10 = £60 million.

Another calculation you can do is estimating the percentage of market share you will be able to command. For example, if you know the face wash and cleanser industry as a whole is worth £1 billion annually, you can realistically expect to capture between 1% to 5%. In terms of value, that equates to between £10 million and £50 million.

Making projections about the size of your market:

The next step in calculating market size is to engage in a bit of future-gazing. Is your market likely to grow or shrink in the future? You can look at historical data to analyse the market’s performance – is it on an upward trajectory?

Now, think about your customer base – is that likely to get bigger? If we go back to the example of the calorie tracker, there’s plenty of available data to show that the overweight population is growing. Will there be more prospective customers in your market in the next few years? If you can show your marketplace isn’t static and is instead evolving, there’s greater reason to believe in a bright future for your product.

When presenting market size and market value statistics for your business, you should try to make one, two and three-year projections. Don’t forget to factor in your anticipated roll out to other geographic areas over time or improved distribution. 

You also need to consider your own impact on the industry. What is your disruptive potential? Most startups are coming to market with an innovative product or service and this can dramatically change the landscape. Think of the way digital cameras virtually destroyed the market for film cameras (and film developing) or the effect Amazon had on regular bookstores.

On the other hand, are there other companies’ products or services on the horizon that threaten the industry as you know it? Do as much research as possible by looking at patents being filed, reading industry media and setting up Google alerts for relevant keywords to keep abreast of things in development. 

Summing up your market sizing exercise:

Now you’ve learned how to determine market potential and you should have gathered together a variety of facts, stats, and calculations along the way. Put all the figures into a pitch deck and make sure you present them in a powerful way – this is one of your most important slides!

Bear in mind that most VCs and angel investors would like to know they’re investing in a market with a large potential size (typically, at least £1 billion). If your numbers are smaller than this, don’t be tempted to over-inflate them. Be honest and explain why you believe in the market’s potential… or why it’s important to bring your product to market (for example, it’s going to make the world a better place). Investors’ investment philosophies differ, so there’s every chance you can find your match.

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