Estimating the market size is the first step in determining if an investment is going to generate an acceptable rate of return. A company planning to launch a new product in an existing market or expand into a new geographic market needs to know the potential market size to determine the minimum it must invest in sales and support staff to gain market share. Realistic market estimates lead to more dependable sales projections and better strategic planning.
Define your target customer profile. Use demographic and lifestyle factors to segment or divide your target market. Demographic segmentation involves dividing the target market by race, ethnicity, gender, education, religious affiliation and other factors. Lifestyle or psychographic segmentation involves dividing the target market by marital and family status, political affiliation, buying behavior and other factors. You can use a combination of demographic and lifestyle factors to define your target customer profile.
Estimate the number of potential customers. First, determine the geographic boundaries of your market. Then, use United States Census data to estimate the number of people in the geographic area who match your target market profile. If this information is not readily available, you might have to commission a poll or use private data sources to estimate the number of potential customers.
Find the average annual consumption per potential customer. Use readily available government and trade association data for this information. Note that higher consumption levels mean a bigger market but it also usually means more competition, which would have an impact on how fast you can gain market share and drive profits.
Determine an average selling price, which depends on your product positioning strategy. If you are trying to compete in the value space, you cannot set a price level higher than the competition. However, if your target customer is more of a trend-follower and more quality-conscious, your price points could be higher.
Multiply the number of potential customers by the average selling price and the average annual consumption to calculate the estimated market size in dollars. For example, if the number of potential customers for your product is 20,000, the annual consumption per customer is 12 units and the average selling price is $20, then the estimated market is 20,000 multiplied by 12 multiplied by $20, or $4.8 million.
The market you are estimating is the total addressable market. Your share of the market will depend on several operational and strategic factors, such as advertising strategy, sales execution, customer retention and competitor response.
- The market you are estimating is the total addressable market. Your share of the market will depend on several operational and strategic factors, such as advertising strategy, sales execution, customer retention and competitor response.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.