What Is Market Sizing And Why It Matters In Business

Market sizing is the estimation of the potential of a market. Incorporating market research, market sizing is useful for businesses looking to introduce a new product or service to evaluate the business opportunity. Market sizing also helps investors to understand the value of the potential opportunity within the target company’s business plan.

Understanding market sizing

For businesses wishing to enter a new market, the research that goes into market analysis is daunting in its complexity. 

Market sizing seeks to remove that complexity by breaking the analysis into smaller sets of assumptions. These assumptions can then be extrapolated to form an overall market size estimate.

Once a business has successfully undertaken market sizing, it can determine the level of investment required and also potential growth strategies. It can also gauge the value of a market and its profitability – factors that ultimately determine whether the business enters said market.

The five basic steps to market sizing

To be effective, market sizing should be a bottom-up approach. Although time-consuming, this approach to market research gives more realistic and accurate market potential. Using the bottom-up approach, market size can be calculated by multiplying the number of units sold by the price of each unit. 

In other words, businesses using this approach start with the smallest known pieces of data and then use these data to build up a realistic representation of their market.

This approach differs from the top-down approach, which is based on generalized and trend-inflated market valuation whose data accuracy is often questionable.

Here is how the bottom-up approach works.

1. Define the target market

The first step is perhaps the most important, and it involves understanding a target audience. In other words, who is the type of person a product or service is best suited to? A buyer persona can help because it allows businesses to be ultra-specific on the type of people they want to attract. 

Then, the business must determine the size of their target market. This can be done in several ways and may involve contacting business organizations or governmental and commerce agencies. For example, a high-end baby food company may contact its local commerce board to determine that there are 550 high-end supermarkets in their state.

2. Assess product interest

Then, the business should determine the number of consumers who may be interested in buying their product. This can be done by looking at competitors and their annual sales data.

However, sometimes this information is hard to obtain. If competitor data cannot be found, then focus groups and surveys can be used to gauge the likely level of interest in a new product. While the baby-food company may have identified 550 stores, they find that only 250 are interested in stocking the product on their shelves.

3. Calculate the potential sales

Calculating potential sales can be tricky, but an accurate approximation can be obtained by competitor analysis or by referring to cash flow forecasting or other finance based models.

In the case of the baby-food company, it estimates a roll-out cost of $20 million across 250 stores compared to potential annual revenue of $60 million. Although the investment is 33% of forecasted annual revenue, profits in the second year sans roll-out costs are significantly higher. Therefore, the company decides to enter the market.

Market sizing example

Now that we’ve provided an overview of market sizing and how it works, let’s take a look at the hypothetical example of a LED manufacturer.

The manufacturer wants to know the size of the residential LED market size in the United States. 

Step 1 – Defining the target market

In first defining a target market, the manufacturer may find there are several audiences worth quantifying. These include:

  • Environmentally-conscious consumers who want to switch out their incandescent bulbs for LEDs.
  • First-home owners who want to incorporate LED lighting as part of a new build.
  • Existing homeowners who want to upgrade or improve the lighting in older homes that are dimly lit.
  • Homeowners living in states where incandescent bulbs have been banned by authorities.

The company can then perform detailed research and determine how many LED units are sold in each market and add them together to determine the total market size.

Alternatively and upon further research, it is found that the total US LED market was valued at $9.89 billion in 2020 and is expected to be worth $17.22 billion by 2028.

However, these data account for LED sales across the residential, commercial, industrial, retail, hospitality, and healthcare sectors. 

Step 2 – Assess product interest

To determine what percentage of total LED sales are residential, the company learns that 47% of all United States households use LEDs for all or most of their lighting

If there are approximately 142.2 million houses in the United States, this equates to around 66.8 million potential customers.

Step 3 – Calculate the potential sales

As we noted earlier, calculating the potential sales for any product or service can be one of the most difficult parts of market sizing.

Below we have listed some assumptions for both existing and new homes in the United States.

Existing homes

  • Approximately 66.8 million homes use LED illumination.
  • The average US home has seven rooms with three LED units in each. Hence, the total number of LED units in all American homes is approximately 66.8 million x 7 x 3 = 1.4028 billion units.
  • Considering the average LED unit lasts 14 years, we can assume that 1.4028 billion units are purchased/replaced every 14 years. As a result, the company calculates that around 100 million units are purchased every year in existing homes.

New homes

  • According to the US Census Bureau, 912,000 family homes were built in 2021.
  • For the sake of this article, let’s assume that every one of these new builds incorporates LED units with none using incandescent bulbs. Let’s also assume that these homes have an average of 7 rooms and 4 LED units in each. 
  • The market size for LED units in new homes in the United States is therefore 912,000 x 7 x 4 = 25.536 million.

The company then adds the number of LED units sold in existing homes and new homes on an annual basis and arrives at a number of 125.53 million. 

If we assume that the average cost of an LED unit (including standard bulbs and more expensive downlights) is $15, the residential market for LED lighting as it stands today is worth around $1.88 billion annually.

Key takeaways:

  • Market sizing is the estimate of the size of a market using insights gleaned from a target audience and existing or potential sales volume.
  • Market sizing is a bottom-up approach that utilizes known data to give a representative view of the larger market. It is more accurate than the top-down approach that relies on generalized or assumption based market data from competitors.
  • At its core, market sizing is an iterative process that is based on an accurate and detailed view of the target audience a business hopes to serve.

Connected Marketing Concepts

Affiliate Marketing

Affiliate marketing describes the process whereby an affiliate earns a commission for selling the products of another person or company. Here, the affiliate is simply an individual who is motivated to promote a particular product through incentivization. The business whose product is being promoted will gain in terms of sales and marketing from affiliates.

Ambush Marketing

As the name suggests, ambush marketing raises awareness for brands at events in a covert and unexpected fashion. Ambush marketing takes many forms, one common element, the brand advertising their products or services has not paid for the right to do so. Thus, the business doing the ambushing attempts to capitalize on the efforts made by the business sponsoring the event.

Brand Building

Brand building is the set of activities that help companies to build an identity that can be recognized by its audience. Thus, it works as a mechanism of identification through core values that signal trust and that help build long-term relationships between the brand and its key stakeholders.

Brand Equity

The brand equity is the premium that a customer is willing to pay for a product that has all the objective characteristics of existing alternatives, thus, making it different in terms of perception. The premium on seemingly equal products and quality is attributable to its brand equity.

Brand Positioning

Brand positioning is about creating a mental real estate in the mind of the target market. If successful, brand positioning allows a business to gain a competitive advantage. And it also works as a switching cost in favor of the brand. Consumers recognizing a brand might be less prone to switch to another brand.

Business Storytelling

Business storytelling is a critical part of developing a business model. Indeed, the way you frame the story of your organization will influence its brand in the long-term. That’s because your brand story is tied to your brand identity, and it enables people to identify with a company.

Content Marketing

Content marketing is one of the most powerful commercial activities which focuses on leveraging content production (text, audio, video, or other formats) to attract a targeted audience. Content marketing focuses on building a strong brand, but also to convert part of that targeted audience into potential customers.

Digital Marketing

A digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

Growth Marketing

Growth marketing is a process of rapid experimentation, which in a way has to be “scientific” by keeping in mind that it is used by startups to grow, quickly. Thus, the “scientific” here is not meant in the academic sense. Growth marketing is expected to unlock growth, quickly and with an often limited budget.

Guerrilla Marketing

Guerrilla marketing is an advertising strategy that seeks to utilize low-cost and sometimes unconventional tactics that are high impact. First coined by Jay Conrad Levinson in his 1984 book of the same title, guerrilla marketing works best on existing customers who are familiar with a brand or product and its particular characteristics.

Inbound Marketing

Inbound marketing is a marketing strategy designed to attract customers to a brand with content and experiences that they derive value from. Inbound marketing utilizes blogs, events, SEO, and social media to create brand awareness and attract targeted consumers. By attracting or “drawing in” a targeted audience, inbound marketing differs from outbound marketing which actively pushes a brand onto consumers who may have no interest in what is being offered.

Integrated Marketing

Integrated marketing describes the process of delivering consistent and relevant content to a target audience across all marketing channels. It is a cohesive, unified, and immersive marketing strategy that is cost-effective and relies on brand identity and storytelling to amplify the brand to a wider and wider audience.

Marketing Mix

The marketing mix is a term to describe the multi-faceted approach to a complete and effective marketing plan. Traditionally, this plan included the four Ps of marketing: price, product, promotion, and place. But the exact makeup of a marketing mix has undergone various changes in response to new technologies and ways of thinking. Additions to the four Ps include physical evidence, people, process, and even politics.

Marketing Personas

Marketing personas give businesses a general overview of key segments of their target audience and how these segments interact with their brand. Marketing personas are based on the data of an ideal, fictional customer whose characteristics, needs, and motivations are representative of a broader market segment.

Multi-Channel Marketing

Multichannel marketing executes a marketing strategy across multiple platforms to reach as many consumers as possible. Here, a platform may refer to product packaging, word-of-mouth advertising, mobile apps, email, websites, or promotional events, and all the other channels that can help amplify the brand to reach as many consumers as possible.

Multi-Level Marketing

Multi-level marketing (MLM), otherwise known as network or referral marketing, is a strategy in which businesses sell their products through person-to-person sales. When consumers join MLM programs, they act as distributors. Distributors make money by selling the product directly to other consumers. They earn a small percentage of sales from those that they recruit to do the same – often referred to as their “downline”.

Niche Marketing

A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

Relationship Marketing

Relationship marketing involves businesses and their brands forming long-term relationships with customers. The focus of relationship marketing is to increase customer loyalty and engagement through high-quality products and services. It differs from short-term processes focused solely on customer acquisition and individual sales.

Sustainable Marketing

Sustainable marketing describes how a business will invest in social and environmental initiatives as part of its marketing strategy. Also known as green marketing, it is often used to counteract public criticism around wastage, misleading advertising, and poor quality or unsafe products.

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