How to calculate your market size

Do you have an amazing new product you’re ready to launch, but unsure about its sales potential? Or maybe you’re looking to project future revenues, but don’t know where to start. Your first step will be to calculate the size of your market. 

We’re here to help you define your market, show you how to calculate market size and how to use this important metric to estimate the potential value of your customers. 

Market size is simply the number of people who could potentially become your customers. Described another way, market size is the size of the sales opportunity available to you. In many cases, the larger the market size, the larger the opportunity. Does that mean that if you’re selling a mass market product with heavy demand, like hamburgers, soda or cell phones, you’ll automatically have a vast market, and therefore potentially enormous revenue potential? Not quite. 

Your market size actually captures the customers you could potentially reach with your product, not the entire population of individuals that consume products like yours. For example: 

Without knowing the size of your potential market, you’ll be missing some crucial knowledge that will help give you an idea of the potential value of your product or service. Specifically, estimating market size can help you answer several questions fundamental to an optimized marketing strategy that has the ability to turn prospective customers into loyal consumers.

Understanding the size of your market is the first step towards getting to know your customers better. Accurate market sizing involves asking questions about the characteristics of your market, such as whether they're male or female, where they tend to live and shop and what their preferences are. With this information, you’ll be able to build up a strong picture of your customers, which will put you in a great position to serve them effectively.

Let’s use our soda example to illustrate how to do this in three steps:

Once you have an idea of the problems that your customers have, you’ll be in a strong position to start to build up a business case for your product or service. To do this, we recommend asking yourself two key questions:

This means narrowing your focus to the specific segment of customers that has the problem you’ve identified.

If you don’t follow the market opportunity, do you stand to lose potential revenues, and how much? This is where your market size data becomes invaluable, because you can use it to estimate the likely value of any sales. 

If you are able to show that the cost of not following the market opportunity is greater than the cost of following it, taking into account factors like investment, business upheaval and reputational risk, then you’ve got yourself a compelling business case for your product.

So now you know the importance of market sizing, but where do you start? The first step is to define your target market. In other words, you need to establish who your audience is and what characteristics they share. To do that, there are a number of tools at your disposal. Here are a few examples:

If you’re already serving your market, developing a customer survey is an excellent way to start gathering data about your customers. Survey data can help you get important information about customer demographics. However, customer feedback data is also valuable in learning more about reactions to your product offerings and identifying any unmet needs. 

If you’re still at the pre-launch stage and you don’t have any customers to survey, there’s a solution for you. SurveyMonkey Audience has a ready made panel of customers, just like the ones you want to serve, on standby and ready to give you crucial insight to help you better understand your future market.

Another valuable source of market sizing data comes from your competitors. If your competitors are large, public companies, sales data might be readily available, which you can use as a proxy measure of market size. This can be used even if your competitors’ data is not available.

Now that you know the parameters of your target market, you can start narrowing and calculate your market size opportunity. To do that, we recommend the following three-step process:

TAM is the total demand for a product or service like yours. If you’re developing a new sugar free soda drink, that might mean estimating the demand for low calorie drinks generally.

SAM is the subset of TAM to whom could feasibly reach within a specific geographical or market area. For example, your new drink might only initially be available to people who live in New York City, or to people who buy at vending machines.

SOM is a smaller subset of the SAM that you will specifically be able to capture. This will include customers that are not currently being served, or that are unhappy with existing market offerings. Let’s assume your new drink might be available in vending machines everywhere. This means only customers who want to try something new or who visit machines that don’t have any alternative sugar-free offerings might be willing to purchase your sodas.

The great thing about defining your target market in this way is that it shows you the scalability of your product—and therefore the full size of the market opportunity. Sure, you won’t be able to serve the total available market in the immediate term—but you could in the future, for example, by expanding your product range, or the geographical distribution of your products and services.

Once you have an idea of the size of your market, you can estimate the market potential, or market volume. Market volume describes the total amount of potential transactions that you could make within a specified period of time such as per day, per month, per quarter or per year. In order to estimate your market volume, you need to know the penetration rate of your product or service.  

Penetration rate is the proportion of the market size that you have served at least once.

The following equation can be used to easily calculate your penetration rate:

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

 For instance, let’s imagine you sell sugar free soda to gyms to load into their vending machines, and your region has 2000 gyms. If you have managed to sell to 150 gyms so far, your penetration rate is 150/2000 x 100 = 7.5%.

With your market volume determined, you can multiply it by the average value of your product or service. For instance, if your average sale to gyms was $10,000 and you sold to 150 gyms, then the market value is $1,500,000. Looking at this the other way, if you increase your penetration to 15%, your market value could double to $3 million! So, market size provides a great basis for understanding the potential for your business to scale, and grow.

Segmenting the market is the first stage of a successful, strategic marketing planning process. After the market has been segmented, you can identify those segments that you view as primary consumers and thus the focus of the bulk of your marketing and sales activities. You can also tailor your marketing mix in a way that the different segments understand and appreciate, thus putting you in a better position to be able to capture and serve these markets.

Using segmentation, you take a diverse population of consumers and divide them into smaller groupings, comprised of consumers that are more homogenous in terms of demographic, psychographic, behavioural and attitudinal characteristics and needs. 

Continually narrowing your market in this way may seem daunting, but there are plenty of tools available to help you. The most effective approach is to use a segmentation survey. This is a specially designed survey that gathers data on factors like customer age, gender, household size and geographical area to build up a picture of your entire customer base, and the factors along which it makes sense to segment them. 

If demographic characteristics like these are important to you, consider using a demographic survey template to get started today. Or, perhaps you’re looking for a more detailed survey, capturing a range of segmentation dimensions like lifestyle factors or attitudes. This can help you quickly build some comprehensive buyer personas.

Using a segmentation survey is just one way of gathering information to better understand the size of your market. Other types of market research can also help you get a handle on likely interest in your product or service, demand for it, and the size of the market that you have the potential to capture.

How well known is your brand? Brand awareness data gives you a good idea of the potential volume of your future sales. If your brand is well known, then you have the potential to reach a larger proportion of your target market. In contrast, if you have a little known brand, your reach is likely to be smaller. If that’s the case, don’t worry: you should see low brand awareness as an opportunity to grow through a careful marketing campaign. In the first instance, we recommend a brand awareness survey.

Analyzing historical transaction data from a previous period can also help you get a better understanding of the size of your market. Sales volume and sales value data will be especially relevant. This data can be captured yearly, quarterly or even monthly. Combined with additional secondary research into the market, such as research that shows how quickly the industry is growing, or an increasing appetite for a product like yours, you can make some pretty solid predictions about future changes in market size.

Market sizing is a catch-all term for synthesizing data from a variety of sources to help you to understand your market size. Market sizing is best used when you’re in the process of developing a new product or service, or preparing to launch it, because it gives you insight into the market potential and likely value of the new market. However, it also makes sense to conduct market sizing activities regularly. 

Markets are not static, and new entrants, and changing customer demand means it makes sense to regularly assess the size of your market. There are two main approaches to this. Let's take a look at each:

Top down market sizing evaluates the "relevant" market size for your offering, and then estimates how much you have the potential to earn from a market of that size. Simply put, it’s a way of estimating market value by extrapolating existing market volume to the broader market size.

For example, let’s imagine your research has revealed that there are 41,000 health and fitness centers located across the United States. You know that you’re currently making an average sale of $10,000 for the 150 gyms you currently count as clients. That means your potential market size using the top down method is a whopping $410,000,000.

Of course, this figure is likely to be unrealistic. Not all gyms will have vending machines, and gyms differ in size, so even if you could sell to all gyms, they won’t all necessarily purchase $10,000 worth of your soda each. So, the top-down method might give you inflated, unobtainable figures, which could undermine the ability to develop a successful marketing strategy.

The alternative is the bottom up market sizing approach. While the top down method is simplistic, the bottom up approach tends to involve a greater investment of time and effort because you use more sophisticated market research. However, if you spend the time, you’ll get a more reliable and accurate estimate of market size.  

Perhaps the most common approach is to use your segmentation data to make estimates of the size and value of each segment, and how likely each is to grow.

As an example, assume that based on your market research, your soda company is targeting two segments: gyms and schools. In this case, you might use a variety of data sources, like your customer survey data, transaction data, or brand awareness data, to estimate the size of both segments. You can then project growth rates based on secondary research. 

For instance, let’s say that your transaction data reveals that 80% of your customers are gyms and 20% are schools. Secondary research shows that new gyms are opening at a rate of 2% per year, but that schools are not growing because of a slowdown in the birthrate. Using this information, you assume that your gym segment will likely grow much faster than your school segment—crucial knowledge in helping you to decide where to focus your marketing resources and efforts.

So, whether you’re just starting out in business or you have an established product and market, you can see that calculating market size matters to making effective business decisions. Ready to get going? Use our market sizing template to start calculating your market size quickly and efficiently, or get in touch with our team of market research experts to help you run a market sizing study tailored to your needs.