How to calculate the market size

What is "Market Size"?

Market size is the number of individuals in a certain market segment who are potential buyers. We will understand this concept in a stepwise manner and at the end of this article, you will understand why this is so important in any businesses.

Let's take a scenario, you are an MBA student and is taking part in a case study competition. The ask of the competition is to build a product, in any one the segment that the company does the business. For simplicity let's assume the segments are - Food, Health and hygiene, Skincare, Personal care and Education.

Understanding the problem you solve for clients and the potential value your solution provides for them is the starting point for determining market size. This is a component that many of you ignore because you are too focused on the product you have created to consider how it will help the audience

Estimating the Market Size!

Step 1: Define your "Target Customers"!

This exercise consists of four steps to help you estimate the total market potential for a product.

The individual/group for whom your product addresses a specific problem is your target customer(s). So the first step is to determine who your ideal customer is and make a profile of your ideal/typical target customer.

Given the importance of establishing your target consumer, it's critical to allow appropriate time for this first step analysis.

Case study: (Refer to above-mentioned scenario) After getting the requirement, researching on the given segments (Food, Health and hygiene, Skincare, Personal care and Education), analyzing the different challenges and need in the respective segments, you decided to go with food segment. The need that you have found is the lack of diabetic food available in the market and the target customer here would be diabetic patients. Now diabetic patient category is also very broad, so you have decided to narrow it down and focus on the diabetic working segment. The region/launch market that you have selected is Mumbai

Step 2: Estimate the number of Target Customers

This is one of the crucial stages, here you are required to estimate the total number of target customers in the market. Keep in mind one thing, it is absolutely fine to not the exact number. But you can refer to research papers or news or census data or consultancy report to guesstimate the number

Case study: After defining the target customer, you have done some more research with respect to the segment that you have defined and what you have found out is the total market size is in the range of 140000 - 160000 ( all the values here are hypothetical and there is no correlation with the actual dataset). For this, you are considering 160000 as the total target customer size

Step 3: Figure out the "Penetration Rate"

Market penetration is a crucial indicator as to whether your marketing and sales strategies are working. Market penetration is the percentage of identified potential customers you have acquired. You can figure out this number by referring to similar companies data. Say if you are building a product in a diet food sector, then refer to similar companies and their product, what is their penetration rate.

Just for your information, the penetration rate is easy to calculate if you know your target market size. To calculate the penetration rate, divide the number of customers you have by the size of the target market and then multiply the result by 100.

Penetration Rate = (Number of Customers ÷ Target Market Size) × 100

For example, if you sell a diabetic food product in a metro city that has 160000 diabetic patients/potential customers and your product is being used by say, 10000 customers, then the penetration of your product would be: 6.25%

Penetration Rate = (10000 ÷ 160000) × 100 = 6.25

Case study: You referred to your competitors' data, connected with different wholesalers and retailers and found out that the penetration rate of the competitors' product (similar product and segment that you have selected) is in the range of 10-18%. For this, you have assumed the average i.e. 14% for your market size estimation

Step 4: Potential Market Size!

Market Volume

To find the overall market potential (that is, the potential market volume), multiply your number of target customers by the penetration rate

Market volume = Number of target customers × Penetration rate

So from all the above steps, the data that we have is:

• Number of target customers = 160000

• Penetration rate = 14%

Market size in terms of volume = 160000 X 0.14 = 22400 customers

Market Value

Market value is nothing but the total sales value from market size. To calculate the monetary value of the market, multiply the market volume by your average value (that is, price expectations).

Market value = Market volume × Average value

For this, let's assume that the selling price of your product would be INR 100 per quantity.

Market value = 22400 x 100 = INR 2240000

Final note

Market size estimation, from the name only it is evident that it will give you only the estimate and not the actual figure. But you can always optimize this by:

By making your first estimate and examining each assumption you make and what would cause it to change. To factor in the risks of change, calculate best-case and worst-case scenarios in addition to your expected scenario. Over time, monitor the accuracy of your initial assumptions and whether you need to modify them.

Did you like this article? Do let me know in the comments. Any feedback and suggestions are most welcome