Market Size Estimation Briefly
The term “market size” refers to the total value or volume of a specific market. It represents the potential sales opportunity for a particular product or service within a defined industry or geographic region. Market size is usually measured in terms of revenue (for goods and services) or units sold. This information provides businesses and investors with crucial insights into the scale and scope of a market. Understanding market size is essential for strategic planning, identifying growth opportunities, and assessing market share relative to competitors. Ultimately, it guides decisions on resource allocation and market entry strategies. In this post, we will discuss top 10 market size estimation methods.
Why to estimate market size?
Estimating the number of customers is at the heart of every business. It’s essential for producing a product that has the best chance of surviving in the market. Market size estimation is not only important for businesses but also for entrepreneurs with new ideas who want to invest their time efficiently. Below, we will discuss the top ten market size estimation methods. The Figure below, illustrates each of the following methods based on their simplicity, accuracy and accessibility scores.
Market Size Estimation Methods List:
This tool takes into account your location, type of business, and products, as well as competitors in that location, to forecast the number of customers you can expect within a certain range. The great thing is that you only need to input a short title, brief description, location, and relevant keywords. The tool will then estimate the market size, eliminating the need for data collection or extensive paperwork.
2. Top-Down Approach
This method starts with a broad market size estimate and narrows it down to a specific segment through successive filtering based on various criteria. Imagine a company wants to estimate the market size for electric bicycles in the United States.
- Step 1: Start with the total bicycle market in the U.S. (e.g., $6 billion). You need to research this amount.
- Step 2: Estimate the proportion of electric bicycles in the total market (e.g., 10%). Usually gathering data for this step is not guaranteed.
- Result: The market size for electric bicycles would be $600 million. In this example, we only applied one filter (10%), but you can narrow down data to your product level, resulting in more accurate estimation. Regardless of the accuracy, you need to find data for every filter you apply, which demands more research.
3. Bottom-Up Approach
The main focus of this method is not to analysis the current state of the market, but show the long term and total market size of the business. This method involves aggregating data from smaller, individual segments to build up to a total market size. As an example, a startup wants to estimate the market size for a new fitness app.
- Step 1: Identify the number of potential users (e.g., 1 million gym members in a city). To get this, you may need to use Zeta Market Size Estimation Tool.
- Step 2: Estimate the adoption rate of the app among gym members (e.g., 20%).
- Step 3: Calculate the average revenue per user (ARPU) (e.g., $10/month).
- Result: The market size would be 1 million * 20% * $10 * 12 months = $24 million annually.
4. Demand Side Analysis
This method estimates market size based on potential customer demand and willingness to pay. In this method, data is gathered based on statistical analysis of surveys. Bear in mind that based on many theories, customers usually are not accurate in expressing what they want, and their behavior may be different from their expressed will (Read More). Example: Estimating the market size for a new smartphone.
- Step 1: Survey a sample of potential customers about their willingness to buy the new smartphone at a given price. Creating surveys is a technical task that has its own challenges.
- Step 2: Extrapolate the survey results to the entire target population (e.g., 10% of 100 million potential customers are willing to buy).
- Result: If the price is $500, the market size would be 10 million * $500 = $5 billion.
5. Supply Side Analysis
This method involves analyzing the production capacity and sales data of existing suppliers to estimate market size. This method is more accurate than other methods, but only if you can gather data from suppliers, which is usually not easy due to the confidential policies that businesses apply.
Example: Estimating the market size for organic skincare products.
- Step 1: Collect data from major organic skincare product manufacturers about their annual sales.
- Step 2: Aggregate the sales data to estimate the total market size.
- Result: If the top five manufacturers report total sales of $200 million, the estimated market size might be around $200 million to $250 million, considering smaller players.
6. Value Chain Analysis
This method assesses the market size by analyzing the value added at each stage of the production and distribution chain. Even though you will have some data, gathering data and its accuracy is not guaranteed.
Example: Estimating the market size for solar panels.
- Step 1: Collect data from major organic skincare product manufacturers about their annual sales.
- Step 2: Aggregate the sales data to estimate the total market size.
- Result: If the top five manufacturers report total sales of $200 million, the estimated market size might be around $200 million to $250 million, considering smaller players.
7. Competitor Analysis
The competitor analysis method estimates market size by analyzing the market share and sales data of key competitors. Market Size Estimation Based on competitor analysis is one of the approaches provided in Zet Market Size Estimation AI.
Example: Estimating the market size for online streaming services.
- Step 1: Identify the major competitors (e.g., Netflix, Hulu, Disney+).
- Step 2: Gather data on their annual revenues (e.g., Netflix $25 billion, Hulu $3 billion, Disney+ $5 billion).
- Step 3: Estimate the total market size by summing their revenues and accounting for smaller players.
- Result: The market size could be estimated at around $35-$40 billion.
8. Customer Surveys and Focus Groups
This method involves directly gathering data from potential customers through surveys or focus groups to understand their preferences and purchase intentions.
Example: Estimating the market size for a new type of wearable fitness tracker.
- Step 1: Conduct surveys or focus groups with a sample of potential customers.
- Step 2: Analyze the data to determine the percentage willing to buy and their price sensitivity.
- Step 3: Extrapolate the findings to the entire target population.
- Result: If 15% of a target population of 50 million are willing to buy at $150, the market size would be 7.5 million * $150 = $1.125 billion.
9. Historical Data Analysis
This method uses historical sales data and growth trends to project future market size. Given that, this method could be accessible by business in which are already operating in the market and have data.
Example: Estimating the market size for electric cars.
- Step 1: Analyze historical sales data for electric cars over the past five years.
- Step 2: Identify growth trends and project future sales.
- Result: If sales have been growing at 20% annually, and last year’s sales were $2 billion, next year’s market size could be estimated at $2 billion * 1.20 = $2.4 billion.
10. Analyst Consensus
This method involves aggregating market size estimates from industry analysts and market research firms.
Example: Estimating the market size for cloud computing services.
- Step 1: Collect market size estimates from multiple analysts (e.g., Gartner, IDC, Forrester).
- Step 2: Calculate an average or weighted average of these estimates.
- Result: If Gartner estimates $300 billion, IDC $320 billion, and Forrester $310 billion, the consensus market size could be around $310 billion.
Summary
It’s important to understand that estimating market size isn’t about exact numbers, but about ranges. We can’t predict exact sales figures, but we can establish a range representing the part of the market that all competitors aim to capture. While numbers give an overview of the market, the key is to compete for a share. Some estimation methods are inexpensive but inaccurate and time-consuming, while others are user-friendly, data-driven, and come with a cost. At Zeta Resolution, our goal is to work with you toward mutual success by providing efficient decision-making data at a compatible price.