What is market size? (Plus a guide to calculating it)
By Indeed Editorial Team
Updated 8 November 2022
Published 30 November 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Most business owners and entrepreneurs carry out a lot of research before deciding whether to launch a company or product. Knowing how many potential customers there are for your goods or services, or the market size, is essential if your business is going to be profitable. It's important to establish that there are going to be enough customers. In this article, we discuss what market size is, examine how it differs from market value and explain how to calculate your market size.
What is market size?
If you're thinking of starting a new business, you may be wondering, 'what is market size?' Market size refers to the total number of potential customers who could buy your product or use your service. This number of potential customers is usually measured over a set period, often over a year.
It's beneficial to know how many sales you're likely to make before you launch a new product or service since that can determine how profitable your business is likely to be. It can help you find out whether it's a worthwhile investment or not. For example, if you're planning to open a new sandwich shop, you could look at how many people work in offices or workplaces nearby who could buy their lunch in your shop. That helps you work out if there's a market for the type of food you're hoping to sell.
Approximating market size
The market size consists of the total number of possible customers for your product or service within a specific market and the returns these sales may generate. For an existing business, you can analyse actual sales to understand the market size. It's useful to use these three quantifiable standards:
Units: The total quantity of products and clients in the market
Value: The total value of products or clients in the market
Market share: The percentage of products sold and clients gained by a specific organisation
Calculating market size is essential. If you discover your market is too small, that could mean your business might not make enough money to survive. The calculation also helps you determine your potential market share or how many customers you may aim for to prosper.
What's the difference between market size vs. market value?
Both market value and market size are important measures within business planning. Market size defines the number of customers a business might attract over a specific amount of time and the revenue it can expect to generate from this hypothetical customer base. For example, a fruit and vegetable wholesaler that sells to small and medium-sized businesses in a particular city could calculate its market size by considering the number of small and medium-sized greengrocers within that city. If there are ten fruit and vegetable shops, that would factor into the wholesaler's market size calculation.
Market value, otherwise known as 'open market valuation', describes how much an organisation or business asset is worth in the financial market. To calculate the market value, multiply the number of outstanding shares by the current share price. Market value estimates how much money you can generate from your business.
Related: 4 Types of Businesses To Start
Market sizing techniques
There are generally two main approaches when calculating the size of a market.
This considers the major variables of your business, such as where you sell your products, how many potential customers you have and the sales figures for your competitors' products or services. For example, if you make wedding cakes, you might look into the number of wedding venues and wedding planners there are in your area, how many of them would be interested in promoting your cakes and how many weddings there are in a year, among other factors.
In the top-down method, you determine the entire market and calculate how much of that market you control and then the amount of money your business could earn from that share of the market. This method takes in your location and size, your segment's population, and the age and income of your target audience. For example, if you believe your business controls 10% of a market containing 500,000 customers, the top-down analysis would calculate a market size of 50,000 potential customers.
How to calculate market size
Whether you're planning to launch a new product, set up a new service, or establish your target audience, it's crucial to understand your market size. Follow these steps to calculate your market size:
1. Define your customer
Think about the type of customer your business or product is likely to attract and create a profile. Your customers are likely to share common traits, such as:
You can determine your target consumers by finding out who currently buys your products and analysing their characteristics. For example, as a shoe manufacturer, you may specialise in sport's shoes and sell to a wide range of customers from very different backgrounds and across all ages. However, most of your customers are aged 25 to 35 years old and male. So this demographic would be your target customer.
2. Research your target customer
Once you've identified your target customer, try to find out as much as possible about this market. You could look at industry reports and market research into the buying patterns of this type of customer. Or perhaps there may be statistics available from government sources such as the Office for National Statistics (ONS). At this point, you're gathering as much information as you can about the size of the particular market and, using the example above, how you may be able to sell your shoes to them.
You may, for example, send out questionnaires to those customers aged 25 to 35 to rate how likely they are to buy more sports shoes from your brand. Decide whether you're looking at the global market, domestic, or local market to sell your products. For example, if you're selling your sports shoes in local shoe stores in a particular city, that's a different market to an online store that could reach customers on the other side of the world.
3. Determine available market and demand
The next step is to determine your market size by looking at how many people may buy your service or product. Though your research has revealed an approximate number of customers, the number of people who follow through and buy your product may be much lower. This smaller subset of the target customer base is the available market.
Taking the sports shoe manufacturer as an example, you may identify 150,000 people interested in a new range of trainers. Still, after researching income and other factors, you find out that only half of them are likely to buy those shoes. That would mean the available market is only 75,000 potential customers. You can then multiply that figure by the total number of sales you expect from each customer over a set period, such as a year. This is your demand.
4. Multiply demand by market value
To determine your market size, you multiply the demand you've calculated by the value of each unit you sell. In the case of the sports shoe manufacturer, the expectation is that your customer will buy one pair of trainers per year, which would be 75,000 units per year.
Calculating the market size is quite simple. If the price of a pair of trainers from the new range is £120, to estimate the market size, multiply its demand of 75,000 by the unit price of £120. The result is a market size of £9,000,000.
Calculating market share
Unless you're launching a completely unique product, the likelihood is that other businesses are selling a similar service or product to the one you're intending to sell. By establishing how many customers buy from your competitors in the market, you can calculate the target market size. If for example, you're thinking of setting up a new dog walking service in your town, you may find out that there are already five other dog walking businesses in the area.
By doing your research, you estimate that most dog walkers in the town walk around 13 dogs per day. You could find out how many dog owners there are in the area and use this to estimate a sensible market share. Think about what market share you would require to recover your costs and how many customers you can acquire to make money.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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