What is market sizing, and how to do it?
This article is called What is Market Sizing, and How to Do It? We discuss what it is, why you need it and how to attempt it.
What Is Market Sizing?
Market sizing refers to the estimated number of potential buyers within a specific market. And the entire sales they may generate.
The Question: What is market sizing and how do you calculate it?
Answer: Market sizing is the process of estimating the total potential sales or number of buyers within a specific market. It’s typically calculated using top-down methods (such as industry reports and government data) or bottom-up approaches (such as customer interviews and sales estimates), often combining both for accuracy.
Market sizing helps businesses assess the value of entering or expanding in a market by estimating potential revenue or demand. It involves using available data, industry insight, and reasonable assumptions to build a credible view of the market’s scale.
Where to start
Whenever you look to enter a new market. Or launch a new product or gain a deeper understanding of your market. When seeking funding, one of the critical areas you need to understand is the size of your market. And how do you compare? Very important when putting their plans together. Marketing Directors need to know where they will market their product. And then determine how they will get there. The market size is an essential aspect of any strategic planning. Understanding your potential and current market size will assist in answering questions like:
- Is the market big enough for us to bother?
- Is the market going in the right direction?
- Should we invest time and resources into this product/market?
- What level of investment should go into this market?
- How fast is the market growing?
- Is there sufficient profit in the market?
It would be helpful to consider the competition you will face. Their profit margins and how much return you can get from the effort. Knowing the size of the market will not help you take advantage of it, but at least you will see if it’s worth the effort.
Why would they buy from you?
To get there, it’s wise for a marketing director to understand why people would buy your products. And why they wouldn’t, how the supply chain will work and whom to target once you launch.
Importantly, you need to determine how quickly you need the information. This means deciding how much detail you need. Because it’s a subjective exercise, it’s challenging to get an accurate market assessment. So expect a well-analysed figure to have an accuracy of between 15 to 20%.
Speed
It may be the case that you need a rough estimate of the market size. You know (or think you know) that the market size can’t be any lower than £70m, but it’s certainly no higher than £150m. So the answer would be between £70m and £150m. This broad exercise may not be efficient unless you are just doing a preliminary market scan. You will need further examination.
Accuracy
You will need a better handle on the potential market if you are looking for a large investment. And if you want to make a big splash in the market. You may need to demonstrate an upward trend or examine specific sectors within the market as a whole.
It is not a weakness to try and find the answer without having to do much work. So the first places to look are at industry Trade Associations. Then, consult government figures, recent surveys, and speak with industry experts. Unless the person you ask has a job title like “Head of Market Sizing”, one industry person will not give you the answer.
Here is an approach which may help you determine market size.
1. Top-down
Look deeper into trade Associations and national government statistics. There seems to an Association for everything you can imagine. So, finding relevant association research in the Directory of British Associations online. These Associations could well have relevant sales or production statistics. Or will you know where to find them?
The UK has excellent data that can be very useful. Take a trip to London and visit the British Library or the City Business Library. Local universities also have business libraries. These libraries have access to various business databases. If you have a spare arm and leg, then you could buy access to these databases. It’s wise to determine which of them is any good. I have been looking at them for nearly 20 years, and I still don’t know. Each one is good for something.
More than one source
Whenever you think you have a market size figure to verify it from 2 or 3 other sources. Cross-reference what you have found. And without letting your confirmation bias get in the way of your thinking. Does the published research on your target market reveal anything about production rates? Sales or revenues etc?
Also, when researching Top-down, you need to think laterally. As it is unlikely you will come across a perfect set of statistics. So you may be looking at the market size of a probe head within electronics production. Calculating the annual sales of these machines with one or two of these probes inside will give you a number.
Suppose you know the number of lorries leaving the manufacturing plant. Every 24 hours. And how many production days do they have a year? All you have to do is work out how many bits of kit are in each lorry to calculate a pretty accurate figure for that site.
Even if you now have a market size picture, it is wise to carry on to the next step. Build a view of the supply side of the market by adding together the sales of companies that operate within it.
Examine the sales of major companies within the market and calculate their market share. Trade press, their websites, LinkedIn, and their sales literature may give you this information. If not, ask them. They may not tell you, but if you ask enough people, you will get the figure. Look at the Sales Directors’ CVs of these big companies. What do they reveal?
How about asking sector trade suppliers, distributors, journalists and companies for their thoughts?
2. Bottom-up
Assessing the customer demand for a product could need interviews or surveys exercises. Within B2B, getting in touch with potential customers is an excellent way of building a picture up. As you start to build a picture, you need to ensure that the data remains reliable.
You can’t just isolate the number of products sold to one company. Then multiply this figure by the number of companies in the market. For a start, it’s hard to determine how many companies are in the market. The companies’ size will vary, and the number of products sold to them could also be inconsistent.
Employee formula
How about taking the number of employees within the industry sector? To calculate the market size using the number of employees, follow this formula:
Market size formula = Total purchases by sample firms X Total people employed in the sector
There are many ways to develop a formula depending on the market sector you are looking at. But it’s crucial that when you are asked how you came up with the figure, you can show your workings. And have a robust case for the validity of your calculations.
Market size
As you can see, market sizing is very objective. You will have to rely on many sources to determine an accurate enough figure. There will be no right answer. This article was titled ‘What is Market Sizing, and How to Do It?’ We discussed what it is, why you need it and how to attempt it.
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