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. 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 have relevant insights into the potential profitability of their products/services in a given market.
Let’s begin by laying some principal foundations about market sizing.
Fundamentals of Market Sizing
Definition and Overview
Market sizing is the process of studying and evaluating a market to determine its size (population) and potential revenue generation. Basically, it’s a process that seeks to understand how big a market is and the level of profit to expect when you offer products and services within such a market and its geography. It gives you an insight into the overall nature of your target audience, which practically defines your expected revenue because they are the buyers and the market.
Market sizing can be conducted for different markets, which includes the following:
Broad Market vs. Niche Markets
The broad market refers to the general or central market of a product, while the niche market narrows 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).
Established vs. Emerging Markets
Established markets here refer to existing markets within an economy while emerging markets are new and developing markets. For example, regular sunglasses are in the established market, while smart sunglasses that can be used as cameras are in the emerging markets.
National vs. Global Markets
National markets are markets within a country while global markets extend beyond the nation’s borders to include international or intercontinental markets. For instance, peanut butter falls within a national market – the United States. However, KFC chicken is in the global market and across over 140 countries.
Market Sizing: An Essential Tool for Business Success
Market sizing is a pivotal tool every business must deploy to facilitate its growth and success. Here are some ways market sizing can benefit businesses.
Gaining Investments
Market sizing can help a business deeply investigate the profitability of a product, service, or market before investing in it. Consequently, the business can invest in products and services that are certain to yield massive returns. A business can also convince another business to invest or partner with it in floating a new product or service or venturing into a new market if it can prove that the new terrain will be profitable.
Hiring Plans
With market sizing, a business can have clear insights on the population and financial value of its potential audience. Consequently, it can determine the number of workers needed to create and distribute the products and services to the target audience.
Developing Marketing Strategies
When a company is fully aware of its potential audience and population, it can create robust marketing strategies that will attract the right audience. Also, market sizing not only reveals the size or population of a market, it reveals essential details like age group, dominant occupation, and demography, which are critical factors in planning a marketing strategy.
Research and Development (R&D)
Market sizing is an indispensable tool for the Research and Development (R&D) teams of a company. It helps them to determine potential customers, where they are, what they want, and how to reach them. By doing so, the R&D team can recommend the right products or services to the management which they can offer customers and make profits.
Setting Price Strategies
One of the foremost benefits of market sizing is that it helps companies set the right price point. Whether it’s a product or service, by identifying the potential audience, their volume, and spending power, a business can accurately set a price point that guarantees massive profits. Typically, the pricing will be highly competitive yet profitable for the business. Thus, a business can avoid underpricing or overpricing a product or service.
Identifying Competitors
Market sizing can also help you identify your competitors in the market you’re trying to penetrate or in the new product you’re about to launch. Knowing your competitors can help you create products or services that would relegate theirs and make yours stand out.
On the other hand, market sizing can tell you how saturated a market is, and you could reconsider venturing into such a market or take your chances. However, this is for an advanced market sizing process where competitor analysis is part of the package.
Steps Involved in Conducting Accurate Market Sizing
When it’s time to conduct market sizing, the following steps are instrumental to the accuracy of the process.
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 do I reach the people I’m targeting?
- What’s the demand for this intended product/service within the market (people) I’m targeting?
Segmenting the Market
After defining your market, you can become more specific about your product/services by segmentation. To effectively segment your market, start by identifying the broad industry your product or service fits into. This could be technology, healthcare, consumer goods, or any other large sector.
Once you’ve identified the general industry, drill down into specific sub-segments. For example, if your industry is technology, sub-segments might include software, hardware, IT services, or telecommunications. Each of these can 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
There are two methods of sizing the market: Top-down Approach and Bottom-up Approach.
Let’s look at these two methods, including their pros and cons, and you can decide which is right for you.
Top-down Approach
This method of market sizing starts with a massive or generic market and works its way down to unique segments or niches. It starts with large numbers and climbs down to the smaller population. For instance, a top-down approach in a market sizing that involves cars in the UK will begin 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 |
---|---|
The top-down approach can be seamless and faster to use compared to other methods. All you need is readily available data in secondary sources or public domain sites. | This approach is not suitable for emerging markets, smaller markets, or disruptive products due to a lack of substantial data. |
The approach is more effective for established markets where data is abundant and similar market sizing estimates/analyses may be publicly available. | The data risks being inaccurate owing to the generic or secondary source. It may overlook certain details unique to your product and demand adequate primary research to be effective. |
The Bottom-up Approach
This approach is the reverse of the first. You can start from a single, distinct, and definite population or individual and walk your way up to the larger populace of the market. Using the previous example, the market sizing of electric cars in the UK will look like this:
- Estimate the cost of each electric vehicle
- Estimate the average mileage per year of each vehicle by a single user
- Estimate the number of electric car owners vs regular car owners in the UK
- Estimate the number of car owners generally in the UK
- Multiply all estimated figures to get the market size.
Advantages |
Disadvantages |
---|---|
This approach benefits smaller and emerging products as you begin from individual estimates to the overall market size. | It can be too complex to conduct and may demand more resources because it’s an in-depth primary research process. It will also demand more time than the top-down approach. |
It provides more realistic and accurate data on the market size because it deals with primary research from surveys, questionnaires, and interviews. | Assumptions and uncertainties about the number of potential customers may be inevitable, which is a principal drawback in market sizing. |
The bottom-up is tailored to suit your unique product and circumstances as it uses your own data. | Any mistakes made during the micro sizing will become more pronounced as you walk up the sizing ladder to the macro level. Thus, it requires meticulous attention, and mistakes are forbidden. |
Key Considerations for Selecting the Best Approach
Both approaches, as you’ve seen, have their pros and cons. What may work for your business may not work for the next business due to uniqueness and market type. Here are some factors to consider when looking for the best approach that best suits your business.
Availability and Reliability of Data
Data is everything when it comes to market sizing. Hence, if you are not certain of the availability of reliable and substantial data, you can opt for the top-down approach and complement it with primary research.
Accuracy and Detail
Accurate and detailed or niche-specific data can inform accurate decision-making in any business. In determining market size, accurate data can reveal the feasibility of a product or service in a given market. Therefore, the top-down approach is more reliable for population accuracy because it involves mass data and avoids assumptions. However, if you are looking for detailed and accurate data, use the bottom-up approach. However, you must have access to primary data, customer insights, and internal research capabilities for the bottom-up approach to be successful.
Step 3: Selecting the Optimal Methodology
Now that you’ve decided on the best approach to conduct market sizing, methodology is the next critical factor.
The Analogy Method
The analogy method compares similar markets in different regions and industries where data is accessible and also similar. By evaluating the similarities and differences in these markets, taking into account certain variables population density, GDP, industry trends, and age bracket, you can estimate the size of your target market.
For instance, if you are trying to launch a fintech app, you focus on similar markets to compare and contrast. By analyzing and comparing what you plan to offer with similar markets like mobile banking and money-saving apps, you can have reliable insights on the potential size of your target market.
Proxy Indicators
Proxy indicators refer to an estimation of a market size using proxies. By capturing proxy indicators, you estimate based on 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 total 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 in the market by multiplying a base number by a chain of adjusting percentages.
For instance, the base number here can be the population of a country, 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 a market’s size by analyzing historical data over time, noting patterns, variations, sequences, and trends. The past has always been a guide for the future and by analyzing data over time, market sizes and trends can be forecasted.
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, the time series is more practical for analyzing seasonal, annual, or monthly sale trends. For instance, products like fireworks and firecrackers record higher sales in seasons like Christmas and the 4th of July in the US.
Regression Modelling
Regression modeling or analysis is a system of determining market size by analyzing 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 geography and age bracket. For instance, a company might be trying to predict its monthly sales of 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 analysis 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
The multiple regression analysis helps businesses to simultaneously analyze different independent variables while noting their individual impacts on the market size evaluation. Thus, businesses can understand their target market better by evaluating the effect of each independent variable among a series of variables on the market size.
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Frequently Asked Questions (FAQs)
Why is Market Sizing Relevant for Today’s Businesses?
Marketing sizing is relevant for modern businesses in today’s highly competitive world as it helps them determine potential outcomes on investments before they invest. 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 top-down, bottom-up, and the analogy method which compares similar markets in other regions and demographics to determine the market size.
What are the Key Factors that can Influence the Accuracy of Market Sizing Estimates?
Some of the key factors that can influence the accuracy of market sizing estimates include the availability of reliability data, the approach and analogy method used, and whether the market is established or emerging.
How Often Should Market Sizing Be Conducted?
The market is constantly evolving, and as a result, market sizing should be done periodically to reflect the changes. Ideally, market sizing should be fine when a company wants to expand into other markets, launch new products or services, and improve existing marketing strategies.
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 get them, assessing the different methods and their pros and cons, and test-running them.
Conclusion
Marketing sizing is estimating the number of people who will purchase a product or patronage a given service in a certain region. Thus, market sizing is an integral business process that helps businesses in many ways. These include attracting investments, planning hiring processes, allocating resources, setting price strategies, and facilitating research and development processes. However, the approach to market sizing is even more important. When there is insufficient reliable data, the top-down approach is better because it narrows down from massive data to a smaller population. By contrast, the bottom-up approach that begins from a single population or distinct data to the general population is best if you have access to internal data and primary research resources.