Market size analysis is a critical component of business plan designing. The analysis helps estimate the potential of a business as well as to measure its outlook. Also known as Market Size Estimation, the process enables the assessment of business opportunities, accurate planning of marketing and sales budgets, and estimation of the growth of a business.
Market size analysis is a complex and data-intensive process that comprises the following:
1. Classifying the market – The first step involves the classification of the target market into Total Available Market (TAM), Served Available Market (SAM), and Share of Market (SOM). TAM refers to the total revenue potential of a specified market; SAM is the percentage of TAM that the concerned company can service based on the product, technology, and geographic capabilities; and SOM refers to the fraction of SAM that the company serves or plans to serve. Historic details as well as future projections would enable accurate strategizing.
2. Determining the approach – The top-down and bottom-up methods are the two approaches used to develop market size estimation. The top-down approach involves the determination of the total market value followed by the estimation of the company’s share in that market. The bottom-up approach is more refined; the company must first identify target customer segments and then estimate their market size and growth potential using this approach. The use of both these methods is recommended to ensure accuracy.
3. Selecting the sources – Both primary and secondary research can provide data sources for market size analysis. Secondary research is easily doable and requires less effort; however, primary research can strengthen the understanding of the market and help make better-informed assumptions. Data can be collected through in-depth telephonic interviews, on-site visits, mystery shopping, and face-to-face/in-person meetings.
4. Analyzing the data – The final analysis of the data is done to reach the correct estimate of the potential market. First, the data is structured; the process of structuring qualitative data into groups or sub-heads to identify trends is known as typology. It allows quick analysis through a comparison of information present in the same “cluster.” Quantitative data or estimates are arrived at by triangulating multiple data sources generated by applying different approaches or sources. This leads to accurate market size estimation. Additional research can be undertaken to further confirm the analysis.
5. Deriving market size estimates – The market size is estimated using the above processes, which helps the business to judge the market potential.
Market size analysis serves as the foundation of a solid long-term business plan. The analysis determines the need and potential sustainable demand for the product. It is an essential exercise for start-ups, as identifying the need and demand for their products would help them attract investor interest. Established businesses should also undertake this exercise regularly to ensure their offerings remain relevant to customers' ever-evolving preferences.
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