For most companies, the idea of market sizing is already understood but not easily accomplished. Many businesses get stuck settling the boundaries or defining the market before they reach the data analysis and implications of their research. Ascertaining market size can answer to different strategic questions related to the levels of investments in the business and profitable growth targets. In addition to that, market sizing can also lead to a quick understanding of the potential B2B business opportunity concerning value or volume and is therefore relevant to decision making and business strategy.
Here are four steps in estimating market size:
Defining the Market
Getting to know about the details necessary to reach your strategic questions is vital to scope your market sizing approach properly. Identifying your market need to be the primary step in estimating your market size, and it’s crucial that you don’t stray from your determined market definition by way of the data collection process.
You can view the market size in terms of TAM (Total Available Market), SAM (Served Available Market), and SOM (Share of Market). TAM refers to the combined revenue in a specified market. Often an investor or a company will need the market size or TAM for a specific geographic area. If you take the example of food packaging, TAM can be calculated by adding the total sale of food packaging producers in a particular market segment or region.
Likewise, SAM refers to the size or percentage of TAM that a company can serve based on product, technology, and geographical constraints. Lastly, SOM is the percentage of SAM that a particular business plans to serve. SOM needs to be less than SAM except in the case of monopoly.
Determining Your Approach
There are two main aspects of deciding market size: top-down and bottom-up. Your chosen approach may be based on the available market information. But the best approach is to maintain market sizing estimations utilizing both methods to gain higher confidence in your estimation.
The top-down method considers a full market-size figure and decides on the percentage that target market shows.
On the other hand, the bottom-up method prepares the TAM by totaling the underlying variables of the target market. This method takes more time to complete and is often considered more accurate.
Your preferred approach will decide the principal sources to estimate the market size. Secondary research is the most chosen form of research in this type of task because it’s easy to obtain and usually cost-effective. Through a single click on the web, a plethora of information can be found at almost no cost. Syndicated or subscription-based research can be an excellent place to start, but many free sources offer valuable information.
Developing multiple estimates through different sources and approaches is necessary. This is often called triangulation. When multiple estimations and sources triangulate, the confidence in a market estimate enhances. In case the approaches differ widely, additional research is needed to minimize risk, and suggested to limit the range of market sizing estimates.
Common mistakes or pitfalls usually start early on by not defining the market or collecting data from non-reputable sources. The market definition should be consistent throughout the data gathering process, and methodology needs to be based on market knowledge- not just demographics. If possible, try to verify each important finding through multiple published materials or primary research. By confirming the findings, you can leverage the value of different information sources and thus increase confidence in the final result.