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market sizing, market, market size, buyers

Market Sizing: Is There A Market Size Formula?

When you have a product or service in mind to create for the market, it’s important to calculate the market size. The bigger the market, the more opportunities you’ll have as a business to not only generate more sales but to improve your company’s presence on the market.

As a business, it’s important to do the work required to accurately calculate the market size potential. However, conducting any level of research can be costly, especially if you’re not sure on how to do it in the most cost-effective manner.

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Conducting Research is Important to Calculate Market Size Potential

In this guide, we’ll look at market sizing for businesses and how it’s beneficial when bringing a new product or service to the market. Having the right formula is crucial for making sure you’re spending money on the right products and churning out the best ones that give you high ROIs.

What is market sizing?

Market sizing is the number of buyers that are estimated to buy a certain product or service. Sizing the market is something that many businesses have to do and should do, regardless of their position in the industry or time spent in existence. 

Even some of the best companies can get a product launch wrong if they’ve developed something that doesn’t have a buyer market available currently. For small businesses, it’s crucial that you’re conducting market sizing in order to ensure every dollar spent is being spent with the right knowledge and intentions.

According to International Data Cooperation, worldwide big data analytics market revenue is expected to be $274 billion by 2022. Data is a sought-after asset that often dictates and influences many companies and their decision-making.

To calculate the size, there are a number of factors to consider that make up the formula. From potential customers to the number of transactions acquired that year, there are lots of variables that can influence the market size result.

How does market sizing benefit your business?

Market sizing is part and parcel of many businesses to secure investors. If you’ve not got evidence to back that your product or service is going to sell well, or sell at all for that matter, investors and money lenders will walk the other way.

There are many benefits to market sizing for your business, here are just a few to consider:

Your business plans can lack viability 

Without accurate market sizing, any business plan that you’re pitching to your executives or to those responsible as investors or stakeholders to the company, won’t be willing to invest. Your business plans can end up lacking viability without data on the market and whether or not this new product you want to bring to market, will make money.

You risk losing a lot of money

With market sizing, you can get a somewhat accurate market level that are likely to purchase your new product or service. That data can serve as a reference point for how much stock you need to create and where you need to be selling it, whether that’s with various stockists or directly in-store/through your site.

Without this data, not only could you generate a lot of wasted stock but you could end up creating products that just don’t sell at all.

Any failed products or services could lead to reputational damage

Reputation is important for any business and it’s important to realize that any failed products or services can end up to reputational damage that’s difficult to come back from. For small businesses and start-ups, reputational damage this early could be something that ruins the business.

The 5 step formula for calculating market size

The process for calculating market size is one that can vary slightly depending on your business and the industry it’s in. However, this is a formula that is universal for any business looking to access the market size available to them for whatever product or service they want to launch to the public or their clients.

  1. Understand and Define Your Target Audience.

The first step of the formula for market sizing is by understanding and define your target audience. It’s important to know who they are and whether or not you’ve got all the data to hand on who your average customer is. The more diverse your product or service is for audience types, the more data you’ll want to acquire.

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Understanding and Defining Your Audience is the First Step

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Your market size can be determined by the total available market, the served available market and the share of the market you have. For example, if you sell clothing, the total available market will be adding the sales of your clothing within a particular area geographically or in a specific market segment.

Served available market is the percentage of the size of the total market that you can serve based on certain constraints. The share of the market is the percentage that your company currently serves or plans to serve.

  1. Determine Your Approach to Market Size.

Your approach to calculating market size can be done in two ways, via the top-down or bottom-up. This may be influenced by what you have available when it comes to market information. 

What does top-down mean? 

Top-down is a method that uses a broader market size figure and then determines the percentage of that market figure that represents your target market. For example, you might sell a specific type of clothing in relation to the broad definition of fashion.

It helps to generate market sizing estimates and a quick assessment that is time-efficient.

What does bottom-up mean?

The bottom-up method takes the total of the main variables within that target market. As a method, it’s often more accurate but takes a longer amount of time to complete.

Depending on your business and its resources, one method might be more worthwhile than the other.

  1. Pick the Right Sources.

From your selected approach, this will often influence what sources you require in order to accurately estimate the market size.

Some of the most common sources of data come through secondary research like online data and data gathered from the government and non-government sources. Other sources would be desk research searches for any data that’s already in existence.

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Existing Data Can Be Helpful When Starting Out

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A lot of the information and data that businesses have is readily available from general web searches. Primary research is often used too, which is referred to as field research. This can often help you find more specific data, rather than making assumptions based on the secondary research that has been found.

Primary research can be anything from telephone interviews to conducting surveys and focus groups that can capture more personalized information.

  1. Gather Trend Information.

Trend information can be a great way to further develop your understanding of the market and how to best influence your products or services to cater to these market trends.

As a form of qualitative data, it often comes through secondary research and looking at platforms that collate trend information in a real-time scenario. Google Trends, for example, is a great tool for any business that’s looking for market information on the industry they’re in or to explore the need for certain products or services that they might be missing.

This data can then be structured and segmented to help create distinct categories that can perhaps give you more insight into what you could deliver to your audience, beyond just that initial product idea.

  1. Focus on Data Analysis.

You’ve got the data but do you have any idea on how to analyze it and pull the right information from it? 

With 63% of organizations reporting the use of big data and analytics as being a competitive advantage for business, it’s important to dissect the data and to find the information needed to help improve your market size estimates.

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Data Dissection is Important to Your Final Estimates

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This is a point where many businesses can fall short of accurately defining the market size because they’ve not got the right data from the relevant sources. Data analysis will be able to determine whether or not you’ve got the information required so that you can move forward with your business ideas or whether it’s back to the drawing board.

This final stage in the formula is what can help validate your initial ideas and to hopefully confirm what you believe is going to be a seller for your business. With data analysis, make sure you’re taking advantage of all the sources you’ve pulled data from.

Utilize this market formula to calculate your market size in 2022

With a lot of competition on the market, understanding your audience fully and what’s out there for your business is key. Utilize this market formula so that you can effectively calculate the market size in 2022 and give your products or services the best chance of success.

Author Bio: Natalie Redman (LinkedIn)

Freelance writer for many clients across multiple industries. Natalie has two years of copywriting experience. Natalie has a wide range of experience copywriting for web pages for businesses across many industries. She’s also an owner of two blog websites and a YouTube content creator.

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