Market size depends upon demand and price during an evaluation period and is typically expressed as dollars per year. Demand is based on the number of customers and the number of times they will need the product during the period. The product's useful life influences the number of times a customer will buy the product. To get a good estimate of market size, you must determine all these factors as accurately as possible, while also examining how much the market size will change if you change any of the assumptions slightly. Looking at such changes will give you an idea of market elasticity and how reliable you market size estimate is.
Define your references. Identify the geographic location and boundaries of your market. Define your market participants in terms of target market, whether you will target everyone within the geographic boundaries or just customers with certain characteristics, or who have access to certain sources of information. Define the evaluation period, typically one year, but a shorter period may be valuable if the product has a short, useful life.
Estimate the number of potential customers based on the geographic area and type of customer defined in Step 1. Use census data for an estimate of the overall population for general targeting or targeting based on public information such as age or gender. Use subscription data for customers using a particular source of information.
Calculate unit turnover of the product in the defined period from the number of customers and the product's useful life. Estimate how many times a customer must buy the product during the evaluation period by dividing the period by the product's life. Multiply the answer by the number of customers to get the estimated number of units of product purchased during the evaluation period.
Survey your target market to determine the average selling price. Check ads for the product to find pricing. Check vendor locations to get on-site pricing. Interview customers to determine what they paid. Find out if there are frequent discounts or other special offers. Estimate the percentage of the total turnover at each price and calculate an average selling price.
Take the product turnover from Step 3 and multiply by the average selling price from Step 4. This amount is the total size of the market for the evaluation period within the geographic area that you are evaluating. If you are considering entering this market, you must evaluate the market share held by each major competitor in the market to help determine the market share your business can expect. Multiply your expected share by the total market size to determine you potential annual business volume.
Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the 1980s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics. He holds a Bachelor of Science degree from McGill University.