How to Conduct a Market Sizing Exercise: A Step-by-step Guide for Accurate Estimations
How to Conduct a Market Sizing Exercise: A Step-by-step Guide for Accurate Estimations
Market sizing is a fundamental and strategic process every business must undertake before rolling out a product or service or when expanding into a new market. Understanding the potential reach and value of your market can dictate strategic decisions and drive investment priorities.
In this article, we discuss a step-by-step guide that reveals how businesses can effectively deploy market sizing to guide and inform their strategic and investment decisions.
Fundamentals of Market Sizing
Definition and Overview
Market sizing is the process of evaluating and identifying how big your market is in terms of the volume or revenue of goods and services sold within the specified market and geography. It gives you an insight into what to expect from the market, helping you avoid surprises while creating a solid business plan.
This exercise can be conducted for different market types and geographic levels, as explained below:
Broad Market vs. Niche Markets
The broad market refers to the main market of a product, while the niche market narrows it down to specific details and sections. For instance, if the broad market is technology, the niche market will be Virtual Reality (VR) or Artificial Intelligence (AI). Another example is the main footwear industry, which can be segmented into more niche markets such as moccasin shoes, running shoes, or high heels.
Established vs. Emerging Markets
Established markets refer to existing markets within an economy, such as regular sunglasses, and emerging markets are developing ones like Ray-Ban’s Meta Smart Glasses that can take high-quality pictures and videos
National vs. Global Markets
National markets are located within a country, while global ones extend beyond a nation’s borders to include international or intercontinental markets. The geographic scope of the market sizing exercise can vary based on business objectives and can cover underdeveloped, developing, or developed countries. For instance, you can assess the market for sustainable buildings in the U.S., then proceed to North America, South America, or globally.
Market Sizing: An Essential Tool for Business Success
Market sizing is a pivotal tool every business must deploy to support its growth and success. Here are some ways market sizing can benefit businesses.
Pursuing Investments
Market sizing can help existing businesses assess the profitability of a geographic market expansion or a new product or service before its launch. It also provides insights to entrepreneurs on the potential success or failure of a new business. Consequently, companies can direct their efforts toward areas that promise significant investment returns. Such profitability assessments can serve as a robust foundation to persuade other businesses to participate in investments or collaboration opportunities.
Research and Development (R&D)
Market sizing is indispensable for Research and Development (R&D) teams. It helps them determine potential customers, where they are, what they want, and how to reach them. By doing so, the R&D team can recommend to management products and services that can potentially generate profits.
Steps Involved in Conducting Accurate Market Sizing
Accurate market sizing begins with a clear understanding of your market. Start by identifying your exact product or service, target customers, and potential demand, then, choose the appropriate estimation method to ensure your estimates are relevant and reliable.
Step 1: Defining and Segmenting Your Market
The first step in conducting a market-sizing exercise is to define the market and its industry. Typically, it involves answering a few questions, such as:
- Which product or service am I creating?
- Who are the people I’m targeting?
- How much revenue can be generated from this market?
- How much is the product and service demand in this market?
After clearly defining your market, you can become more specific about your products/services by determining the sector and sub-sector to which they belong. First, start by identifying the broad sector your product or service fits into; it could be technology, healthcare, consumer goods, or any other large sector. You can then drill down into specific sub-sectors. For example, if your sector is technology, the sub-sector can include software, hardware, IT services, or telecommunications. Each may be broken down further; for instance, the software segment might include categories like enterprise software, mobile apps, or cloud services.
Step 2: Choosing the Right Estimation Approach
Once you have defined and segmented your market, you should pick the market sizing estimation method that best suits your needs; this could be either a top-down or a bottom-up approach.
Let’s look at these two methods, including their pros and cons, so you can decide which one is the most appropriate for your business.
Top-down Approach
This method starts with a broad market and then narrows it down to specific segments or niches. To illustrate, a top-down approach to market sizing involving cars in the UK would typically start with the following:
- Estimating the number of car owners in the UK
- Estimating the number of electric car owners and regular car owners
- Estimating the mileage of each electric vehicle by a single user in a year
- Estimating the cost of each electric vehicle
- Multiplying all the estimates to arrive at a definite market size.
Advantages |
Disadvantages |
|---|---|
| Seamless and relatively quicker as it leverages readily available data from secondary sources. | Not suitable for emerging markets, smaller markets, or disruptive products due to a lack of substantial data. |
| Effective for established markets where data is abundant and similar market size estimates/analyses may be publicly available. | May overlook certain details unique to your product or service, resulting in potential data inaccuracies due to the broad and high-level nature of the gathered data. |
The Bottom-up Approach
This approach is the reverse of the first. You can start with a clearly defined and specific population and then expand to encompass the larger market. For example, a market-sizing exercise for toothbrushes in the U.S. would proceed as follows:
- Determining the cost of a single toothbrush.
- Estimating the number of toothbrushes an individual uses in a year.
- Estimating the cost of the total number of toothbrushes an individual uses in a year.
- Estimating the number of individuals that buy toothbrushes in the US.
- Multiplying all the estimated figures to get the market size.
Advantages |
Disadvantages |
|---|---|
| Benefits smaller and emerging products as you begin from individual estimates to the overall market size. | Requires more in-depth primary research and internal data analysis, making the process relatively more complex and time-consuming. |
| Provides more realistic and accurate data on market size as it leverages primary research from surveys, questionnaires, and interviews. | May involve many assumptions and uncertainties about the number of potential customers. |
| It is tailored to suit your unique product and circumstances since it uses your data. | Requires meticulous attention to detail, as any mistakes made at the micro level will become more pronounced at the macro level. |
Key Considerations for Selecting the Best Approach
Both approaches have their pros and cons. What may work for your business may not work for another due to unique market characteristics and business needs. Here are some factors to consider when looking for the best approach for your business.
Availability and Reliability of Data
Data is everything when it comes to market sizing. Hence, if you are not certain of reliable and substantial data availability, you can opt for the top-down approach, as it is less data-intensive and more estimation-based.
Accuracy and Detail
When a precise and granular estimate is required, the bottom-up approach is more suitable. It captures multiple aspects and variations of the market through primary research methods, including customer insights, surveys, and interviews.
Step 3: Selecting the Optimal Methodology
Now that you’ve decided on the best approach for market sizing, your methodology is the next critical factor.
The Analogy Method
The analogy method compares similar markets in different regions and industries where data is accessible. By evaluating the similarities and differences in these markets and taking into account certain variables like population density, GDP, industry trends, and age brackets, you can estimate the size of your target market.
For instance, if you are trying to launch a fintech app, you should focus on similar markets to compare. By analyzing and comparing what you plan to offer with similar markets like mobile banking and money-saving apps, you can gain reliable insights into the potential size of your target market. This same market can also be assessed across geographies based on similar population and GDP data.
Proxy Indicators
Proxy indicators refer to market size estimations using proxies or similar products in a broader category. For example, a proxy for microwaves can be a TV or refrigerator. The assumption is that households that can afford TVs or refrigerators are financially stable enough to afford microwaves. Therefore, the number of households using microwaves can be estimated by the number of households with TVs or refrigerators.
Chain Ratio Method
The chain ratio method estimates the size of a market or the demand for a product by multiplying a base number by a chain of adjusting percentages. For instance, the base number here can be a country’s population, while the varying percentages can be the number of people within a certain age bracket. It can also be the number of people who use mobile devices instead of desktop variants if the intended product is a software app.
Time Series Modelling
Time series modeling estimates the market size by analyzing historical data and noting patterns, variations, sequences, and trends.
A typical example is in the retail sales industry. Retail brands can determine the size of their markets or the number of sales they can make in a given season by studying previous sales data. However, time series modeling can be even more efficient when analyzing seasonal, annual, or monthly sales trends. For instance, products like fireworks and firecrackers record higher sales in seasons like Christmas and the 4th of July in the United States.
Regression Modelling
Regression modeling, or analysis, involves the analysis of dependent and independent variables. Dependent variables refer to the potential market size or outcome. On the other hand, independent variables can range from demographics and GDP to geographies and age brackets. For instance, a company might be trying to predict its monthly sales for a given product, which is the dependent variable. However, it has to relate to an independent variable, such as marketing or production costs, which are independent variables, to come up with a concrete analysis of what a potential market size will look like. This methodology is often the most complex and involves two types, which are:
Linear Regression Analysis
Linear regression seeks to identify the correlation between a dependent variable (market size) and one or more independent variables, such as advertising cost, product cost, economic trends, and demographics or geography. By incorporating a linear equation into data analysis, businesses can project a market’s size based on the values of independent variables.
Multiple Regression Analysis
Multiple regression helps businesses simultaneously analyze different independent variables while noting their individual impacts on the market size evaluation. Thus, companies can better understand their target market by evaluating the effect of each independent variable among a series of variables on the market size.
Infomineo’s Expertise in Market Sizing and Comprehensive Market Assessments
Infomineo has extensive experience conducting market sizing studies for a variety of industries. By leveraging Infomineo’s market sizing capabilities, our clients can gain critical insights into the potential of a new business venture, product, or service and evaluate their market entry strategies.
Our team assesses a range of methodologies to identify the optimal approach to address specific research questions, considering data availability and research objectives. This ensures that the market sizing insights we deliver are tailored to the unique needs and challenges of our clients, enabling them to make informed and data-driven decisions.
Our comprehensive and multi-faceted approach empowers our clients to navigate complex business landscapes with clarity and confidence.
Frequently Asked Questions (FAQs)
Why is Market Sizing Relevant for Today’s Businesses?
Marketing sizing is relevant for businesses in today’s highly competitive world as it helps them determine potential investment outcomes before investing. It also helps them allocate resources, understand their competition, avoid overpricing and underpricing, and devise market expansion strategies.
What are Some Common Methodologies Used for Market Sizing?
The most common methodologies for market sizing include the Analogy Method, the Chain Ratio Method, Proxy Indicators, Time Series Modeling, and Regression Modeling. The method you choose will depend on the desired outcome, the available data, and the resources at your disposal.
How Can I Know Which Market Sizing Methodology is Best for My Business?
You can determine the best market sizing methodology for your business by defining your goals and objectives, evaluating the availability of the data you seek and the resources to obtain it, assessing the different methods along with their respective pros and cons, and testing them.
What are the Key Factors that can Influence the Accuracy of Market Size Estimates?
Some key factors that can influence the accuracy of market sizing estimates include the availability of reliable data, the leveraged approach and methodology, and the nature of the market.
When Should Market Sizing be Conducted?
The market is constantly evolving, and as a result, market sizing can be conducted when a company wants to expand into other markets, launch new products or services, or improve existing marketing strategies.
Conclusion
Market sizing is an integral research process that can help businesses attract investments, plan hiring processes, allocate resources, set price strategies, and facilitate research and development processes. The choice of the market sizing approach between top-down and bottom-up is even more important. You can use the one that best fits your business needs along with one of the 5 estimation methodologies, which are Proxy Indicators, Time Series Modeling, Regression Analysis, the Method of Analogy, and the Chain Ratio Method. The choice of approach or methodology not only depends on your research objectives but also on data availability, market and geography coverage, and previous experience.
