You may have a breakthrough idea—one that disrupts an existing market or creates an entirely new market—but you won’t know how valuable the idea is until you get a sense of the size of the market you’re playing in.
Why bother with market sizing?
- It tells you whether you should even bother with your idea. Some ideas satisfy a market need, and people are willing to pay for them, but there are so few potential customers that it just doesn’t bother to pursue the idea. Which leads us to the next point…
- It tells you if you need to tweak your idea. Many ideas are a great start but need to be modified (either now or when you’re ready to expand) to address a larger market. Doing some basic market sizing can help you find out if that’s the case for you.
- It gives you a sense of your growth potential. You can’t really know if you’re growing quickly until you have a vague sense of your total potential growth ceiling (i.e., what full market saturation looks like). If you feel like growth is sluggish, it could be because you’re serving a small market, and it’s time to expand your product or service. But, you can’t know for sure until you do the market size math.
- It tells you when it’s time to expand. You’ll inevitably hit a ceiling for your business, and it’s good to know roughly what that ceiling is so you don’t dwell on stagnant growth instead focus on your next move.
Step 1: Start with the number of consumers or businesses
Most people labor over where to start with their market sizing. In fact, there’s an incredibly straightforward starting point:
- The number of consumers in the U.S. OR
- The number of businesses in the U.S.
Step 2: Narrow the market to your focus
Next, you want to calculate the percentage of either entities or consumers relevant to your offering. You may have a whole number to work with, or you may need to multiply the number of businesses or consumers by limiting factors. Sample limiting factors for both B2B and B2C businesses include:
- Beliefs / attitudes
- Behaviors (e.g., similar product purchases)
Step 3: Multiply by price per purchase
The average price per purchase can come from a variety of sources, and the two most straightforward are:
- The average price of competitive products or services
- Your average sales price (especially if it’s in-line with competitors’ prices)
Step 4: Multiply by number of purchases per year
Market size estimates are almost always based on average annual spend. Multiply your average sales price by the number of times a customer would typically make a purchase. Some businesses—such as many B2B SaaS providers—sell annual licenses, in which case this step is easy. Consumer brands, however, often aim for repeat purchases. Do the math to ensure average spend is annualized.
Step 5: Create a range for your market size estimate
Don’t fall into the trap of false precision! You’ll help yourself by recognizing that the figure you just landed on is not an exact figure. Do yourself a favor and create a market size range by figuring out which variable is…variable. What would be a reasonable lower price point for your offering? A reasonable higher price point? What would a smaller number of purchases per year look like? A greater number of purchases? Ask similar probing questions to develop a range for your market size.
What’s next? Read “Building Buyer Personas that Work” to develop buyer personas that exemplify your target audience and align your organization.
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