One of the most crucial parts of any business strategy is having a clear understanding of your market size – the number of people in a certain market who are potential buyers of your product or service. You need customers to stay in business, so it’s an important number to know.
5 Crucial Points of your Market Research Process
- Identify your target customer.
Your first step is to define your target customer, i.e. the people who will buy from your specific company. If you run a party-planning company, for example, your target market isn’t simply everyone in the world. You have to dig deeper into who will use your particular party-planning service. Understand their demographics such as gender, age, location, and income. Additionally, consider their psychographics, including their interests, values, lifestyle, and spending habits. If you plan weddings, for example, your target demographic would likely be men and women in their twenties and thirties who can afford your fee and are getting married near you or are willing to fly you to their event. They are hiring a party planner because they want to get hitched without a hitch.
- Estimate the number of target customers.
Now you have to figure out approximately how many target customers there are for your business. If you are in the United States, it can be helpful to look at data and statistics from Small Business Administration and USA.gov. You can also learn more about your specific industry by researching similar companies’ public sales records and social media following and looking at trade journals for your industry. If you are a New York City-based wedding photographer, you can look at census data to find out there are 8.5 million New Yorkers and that 58% of New Yorkers categorized as an adult are unmarried. So there is a lot of potential for business!
- Determine your market penetration.
Your market penetration is the percentage of customers that have purchased your company’s product instead of buying a similar product elsewhere or not at all. It’s easier to identify your market penetration if you are already in business, but you can also find out an approximation from analyzing the sales numbers for your closest competitor. And remember that the more niche your business is, the smaller the market penetration. For example, there will be more people looking for event photographers than wedding photographers.
- Calculate the total market potential.
Now figure out the total market potential, which is the number of potential sales for a type of product in your industry at a specific time period. You can calculate it by multiplying the number of purchasers in the market by the amount purchased by a typical customer, then multiplying the total by the price of one unit of the product. To calculate your specific market potential, multiply your number of target customers by the market penetration rate.
It helps to have a unique value proposition. Let’s say you are trying to raise money from investors. You could say that you are going to disrupt the multi-billion-dollar wedding dress industry, which is impressive and shows a large market size.
But the next question the investor is bound to ask is, “Okay, but how?” Well, what if your business makes plus-size wedding gowns at affordable prices? You can explain that the average American woman wears a size 16, but that only 20% of the main wedding dress retailers make size 12 and above – and only 10% of those retailers are in your general price range. Your investor is going to be much more impressed because you have a specific reason that your company could disrupt the market.
- Continue to research your market size.
Think about market size each year and whenever your business idea changes. Let’s use the plus-size wedding dress company example again. If you dig into the statistics, you’ll see that size-inclusive apparel has been increasing. It grew 6% to $21.4 billion in 2016, according to Washington Post reporting. Now you’ll have even more impressive statistics to prove that your company will be successful!
What is your best advice for calculating market size? Let us know your tips in the comments!