Market research is essential in the development of a business, regardless of the industry that they operate in. Market size estimation forms an integral element of any market research study. Market size estimation helps in understanding the potential revenue that could be generated by your business and should be a major consideration in your business strategy, as well as a determining factor of the products or service offering of the company. An effective market size estimation provides insights that can drive the future success of the business, including potential market size, or the total number of buyers for the product or service. The implication of market size estimation for any business success includes competitive advantage, profitability, business strategy, consumer behavior, and market trends — all of which has a great influence on a business’s path to growth.
Steps in Market Size Estimation
Define the market
One of the first steps that enterprises must undertake during a market size estimation process is to define their target market. A company’s target market involves customers for whom the company’s products or services solve a particular problem or meet their demand. Having a clear idea of the market would help companies in accurately determining the market potential and estimate the available share of the market.
Determine the approach
There are two basic methods of market size estimation: the top down and the bottom up approach. The top-down methodology determines the percentage that the target market represents by using a broad market size figure. For instance, for market size estimation of the food packaging industry, retail sales of packaged food can be multiplied with an assumed packaging cost. However, one of the major drawbacks of this approach is that it seldom provides the detail necessary for a true opportunity analysis. The bottom-up methodology involves totaling the main variables of the target market. This approach is considered to be more accurate, however, takes considerably more time to complete.
Select the source
This step is concerned with identifying the sources of data for market size estimation. Businesses can either choose to undertake primary research or a secondary research. Secondary research searches for existing data and is the most commonly used as it is quicker to obtain and therefore usually more cost effective. Primary research, on the other hand, is often used in addition to secondary research. The primary research can strengthen your understanding of the market, allowing you to make better-informed assumptions.
Analyze the competitors
It is essential for every business to know what their competitors are doing in order to gain an upper hand in the market. This also helps the company to clearly determine their market share. Identifying competitor strategies will help companies to formulate better tactics to draw the customer’s attention and garner a greater chunk of the market share.