# How to Calculate Your Market Size: A Comprehensive Guide

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01

## Introduction

• This is one of the first and most important things that entrepreneurs consider before launching their product or service. But why is it an important consideration? Well, because the larger the market, the larger will be your business.
• It’s crucial to get a good sense of your market and find out how many people would be interested in your market. This is where market sizing comes into the picture.

If there aren’t simply enough customers in the market to support the fantastic business that you’ve built, you’ll run at a loss. Most professional business owners know how to calculate market size. They conduct market sizing prior to starting a business or as a part of their business planning.

Do you know your market size?

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02

## What is Market Sizing: An overview

To understand what market size is, the first step is to understand what a market is.

A market, in the most basic sense, is a set of potential customers who are connected by common needs and are willing to buy a given set of products or services. Now that we’ve crystalized what a market is, let’s understand what a market size is. The „market size“ is the total number of potential buyers of a product or service within a given market segment. In simpler terms, it means the number of potential customers that you could sell your product or service to.

It is something that companies determine before they launch their product or service.

Sizing the market lets them estimate the potential of a market which includes:

• The total revenue opportunity for their product or service, and
• The available market for which they can practically compete

### Components of market size:

• The total potential size of a market
• The major competitors in a market by category
• The composition and profile of a target customer
• The products/services available in the market
• The most significant trends in the market

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03

## Why market sizing is necessary

Before going on how to calculate market size, let’s understand why market sizing is so valuable to your business. Market size is one of the most essential components of strategic marketing planning. With an in-depth knowledge of the size of your target market, you can analyze potential market opportunities and accordingly plan a wise business approach.

Estimating the market size is a critical first step for any new product development initiative. It helps entrepreneurs, investors, and other decision makers to make the right decisions by giving them a sense of the potential return that the market offers. Sizing a market is important for so many reasons, such as:

• Estimating the profit potential of a new business, product, or service
• Quantifying the sales and growth potential of new product markets or customer segments
• Identifying product lines and customer segments with good growth opportunities
• Specifying competitive threats and strategically responding to them
• Determining the issues affecting the market

Importance of market sizing

• Estimate the profit potential
• Quantify the sales potential
• Identify profitable product lines and customer segments
• Specify competitive threats
• Determine existing market issues

04

## How to calculate market size: A step-wise approach

Market sizing allows decision makers to estimate the growth potential of a particular market, identify relevant market segments, set sales performance goals, and identify promising geographies and customer types. Whether you’re a seasoned market researcher or not, you will come across different approaches ton how to calculate market size. Regardless of the approach you use, the steps to calculate a potential market size remain the same:

### Identify and define your target market

• Knowledge of your target customers and their needs is the first step towards defining and predicting your market. You can gather initial data by carrying out some consumer research or through a tool like a market sizing survey software that lets you survey millions of people online, globally.
• You can start by dividing your market into specific groups or segments and set a few characteristics to define each of them. Now you can easily choose the ones you want to focus on first.
• Ensure that the product or service you’re offering fulfills a unique need of your customers.

### Determine the market competition

• Look at the competitors. Find out how crowded your target market is. Identify the major market leaders. This should give you a good sense of the potential market share you can capture in the market.
• For instance, if you’re thinking of starting a new airline in the travel industry (which is a pretty crowded market and highly competitive one), you’ll want to look at the companies at the forefront like American Airlines, Southwest Airlines, Qatar Airways, and Delta Airlines, among others. The likelihood of getting a good market share in such a saturated market is pretty thin. On the other hand, a niche business like steel production can even get you a market share of 50% or more.

### Choose a market size determination approach (Top-down or Bottom-up)

• To answer the question „how to calculate market size“, there are two basic approaches that include a top-down and bottom-up approach. It’s hard to say which is better out of the two. An approach that works extremely well for you might not work for others.
• The best market sizing estimation approach is the hybrid approach â€“ a combination of both methodologies â€“ which gives a more accurate estimation.

The top-down methodology

• This approach uses a broad market size figure (or the industry size estimate) and determines the percentage that the target market represents to give you your Serviceable Obtainable Market (SAM), which is typically the section you can realistically target. Although a simple method, it often ends up being unreliable or unrealistic.

The bottom-up methodology

• This approach builds the Total Addressable Market (TAM) by totaling the main variables of the target market. Although it is a more time consuming methodology, it is far more realistic and accurate, which is why it’s most useful for new markets or markets with least competition.
• How to calculate market size using this approach? Start small with your own product and work out your way to the result.

### Calculate the market size

• Realistically, your start up business will not be entirely unique. There are high chances that your competitors will also be targeting the same customers that you will target. However, they will have an established market share that you won’t have, at least initially.
• This is the final step on how to calculate market size. Take the total number of customers who buy from all competitors in the market. Look at the target market and estimate a sensible and realistic market share that takes into consideration all the competitors, their offerings and routes to market.
• Example: If there are 1,00,000 customers paying for online courses between 50 companies (competitors), then each company would have around 2% share.

### In the end

• According to a report published by Statista on Nov 4, 2020, 10% of the total market research spend in the U.S. was on usage and attitude studies. Another report by the database platform suggests that surveys were by far the most used traditional quantitative methodologies in the market research industry worldwide.
• Market research is like looking in the rear view mirror of a speeding car. It lets you get an idea of what your consumers are looking for.

05

## Key takeaways

• Your market size is the total number of potential buyers of your product or service within a given market segment.
• To calculate market size, you need to define and understand your target customers, look at competitors and their market share, and choose a market size determination approach.
• As of 2020, a report published by Statista suggests that surveys were by far the most used traditional quantitative methodologies in the market research industry worldwide.
• Quantitative data is more powerful than qualitative data, especially when the question is, „how to calculate market size?“.
• Online surveys are often the least expensive and the most convenient method to find out if people would be interested in your product offering. Voxco’s market sizing survey software stands out in terms of providing an accurate estimate of profitability when entering a new market.
• The estimation of your market size will ultimately help you decide whether the investment is worth the risk.Â