Determine the potential revenue your business could generate with your product or service in the current market.
Market size determines the potential revenue your business could generate with a product or service in the current market. It influences your business strategy, the value of each sale, how you develop your products and services, and which innovations you focus on and invest in.
It’s not realistic for startups to expect to gain 100% of the market. Instead, it’s wise to focus on specific groups of customers, target them with appropriate price points, and potentially rollout products and services in specific geographical areas.
Understanding this helps you create your own place in the market, build on it, and expand in a sustainable, consistent way.
How does market size affect your business’ value?
Helps secure a competitive advantage.
Demonstrates how much future success your business could experience.
Shows how much revenue potential there is in your niche, and what percentage currently belongs to your business.
Highlights total number of buyers or service users, and what they’re worth.
1. Understand your market potential
To begin to understand your market size, it’s crucial to collect and interpret customer data.
This data will demonstrate how your products and services currently serve the customer, and how effective your sales, marketing, and branding efforts have already been.
Step 1 – Explore your target customer and who they are
Create a detailed profile of your audience, including their aims, worries, problems, preferences, and more. This analysis will demonstrate who’s in your market and how you can best serve them.
Step 2 – Estimate how many target customers you have
Your estimation will depend on what your product or service is, who you’re targeting, and how regularly they’re likely to purchase. You can also use national statistics, industry data, and other metrics to work out how many people could be potential customers.
Step 3 – Define market penetration rate
Penetration rate is how many customers are currently using your product or service, or similar. This illustrates how many potential customers are still in need of it. Something specialised or brand new is likely to have low market penetration.
2. Conduct comprehensive market research
Market research can help any business in any sector develop its products and services, target audience, customer communication, and more.
Effective market research can include:
Focus groups and interviews
Observation
Surveys
Customer case studies
Product testing
Advertisement testing
Price research
Market research provides insights that can drive a business’ future success, highlight market potential, and identify the total number of potential buyers.
What you could discover with market research:
Why market penetration is currently low/high: if customers have unmet needs, you could step in and provide them.
Which demographics are ‘untapped’: some customer groups are better served than others.
How you can appeal to customers who are currently dissatisfied: a focus group or survey is a great place to find out what potential customers want (and don’t want!)
What your competitors are doing well and not so well: find out who else is in your market and what their customers think of them.
If your advertisement and promotions are as effective as they could be: advertising helps you secure your place in a particular market. The best way to find out if it’s working is to put it to the test!
When you summarise the findings of your market research, you’ll be able to report back to stakeholders throughout the business. The research should paint a picture of your current market position, and what it could be like in the future.
3. Do the maths to determine market volume and value
With all the data you’ve collected, you can project your potential market size and its value. The figures aren’t an exact prediction, but can help you calculate the most likely scenario, as well as best-case and worst-case.
These figures will include both people who’ll be ready to buy fairly quickly, as well as late adopters who need some more convincing.
Calculating market volume
Number of target customers X Penetration rate = Market volume
Calculating market value
Market volume X Average value = Market value
Why investors look at market size and value
Investors like to see these figures because it improves your credibility and tells them how much potential growth there is in the market as a whole. A business with a large market volume and value could significantly increase revenue.
The power of understanding your market size
Market size is an important business metric for everyone to understand, from management decision-makers to board members and investors. It helps you develop a clear roadmap for the next steps, as well as understand where you’ve come from.
WANT TO LEARN MORE
Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
Contact Us to find out how we can partner with you to accelerate your business growth.
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