Wondering why so many startups fail even with the most viable product and cut-throat technical assistance?
While there might be many answers to this, not identifying your target customers and the size of your market, meaning how many customers would actually buy your product, who are these people, and the competition they’re buying from currently, are some of the major reasons.
This is easily avoidable. Identifying target customers and the market size is an unavoidable step while taking the next step or approaching third-party financings such as angel Investors and Venture Capitals as they are interested in knowing the market size of your product before pouring thousands into your business.
However, it is also an equally important step to take when self-funding as identifying target customers and market sizing, a concept that we discuss further, helps you in product development, market size analysis, distribution, hiring employees, and technical assistance.
In this article, we will assist you with simple and straightforward methods for identifying your target customers, market size calculation, market size analysis, and much more.
So! Keep reading.
- Simple Market Sizing Methods – A Beginner’s Guide
- 1. Top-Down Market Sizing
- 2. Bottom-Up Approach
- 3. Target Market Analysis
- 4. Apply market size data
- 5. Identify competitors
- 6. Reaching your customers
Simple Market Sizing Methods – A Beginner’s Guide
1. Top-Down Market Sizing
The top-down market sizing approach, given by Goodman, originally for strategic reading of target material is also popularly known as the bird’s eye view, is a calculative method to analyze the potential of your product in the market.
It gives an overview of the entire business field and is a calculative method to understand if your potential business idea is desired in the market or not.
How to calculate the market size using the top-down approach?
Step 1 – Start by taking the current market for your product as a whole taking into consideration all potential customers and revenue. This is called as total addressable market (TAM).
Step 2 – Spend your time and money on legible resources and data. Some data that can be used to calculate market size is free on the internet, however, we recommend going for trustworthy sources even if it calls for a higher budget and letting analysts and the Bureau of Labor Statistics do their job along with your own primary research.
Step 3 – Here you need to make some realistic assumptions and consider a serviceable available market (SAM) and a serviceable obtainable market (SOM). It is important to keep a consistent approach and rely on the same data for all decisions and assumptions.
Step 4 – Observe your target audience keenly. While it is beneficial to find the market size data from a reliable third-party organization, no one knows your audience better than YOU!
Let’s see an example of top-down market sizing calculation.
Imagine that your organization markets customized stationery for book clubs in India. Your research shows that there are 6,000 registered book clubs in the country and the average sale per book club is INR 30,000 indicating that your market size is INR 180 million.
However, as it is visible, the top-down approach is very unrealistic and overly optimistic. It is obvious that not all book clubs in India will need supplies worth INR 30,000.
Naturally, the top-down market size calculator approach is only for theoretical purposes and not a reliable approach to carry out your business.
We still recommend carrying out the top-down market sizing approach as it indicates the maximum level of success in a business idea, thus helping you analyze if a product or service is worth launching in the market.
2. Bottom-Up Approach
The botton-up approach was first given by E.J. Gibson, for the perception of human beings.
This is a more realistic and approachable market-size calculator, although requires intricate research and is time-consuming. It starts from approaching the number of product units you can expect to realistically sell, anticipated sales, and then finally the average price of the product.
Taking the same market sizing calculation example, say your research indicates the average cost of a stationery item required for book clubs cost INR 500. And assuming that a customer buys 5 products each month or 60 items a year. This indicates that an average customer spends INR 30,000 every year on stationary.
If your target audience that will actually buy your products is 10,000, your market size will be – 30,000 * 10,000 = INR 300 million.
Thus, the bottom-up approach is more intricate in market size analysis and surely more dependable and widely used in business.
It’s still important to note that this method ignores the existence of competitors, marketing and product development failures, customer churn rate, and many other factors that directly or indirectly may affect sales.
3. Target Market Analysis
Step 1 – Identifying Target Customers
Your target customers are the people from whom your technology solves a specific problem and provides an innovative solution with a long shelf life.
This is generally niche specific. Your company provides a product or service that solves a crucial problem in a niche, making the people working in that niche your target customers.
The product or service you intend to provide must be long-lasting and able to handle the strong inflow of the target audience and their needs when necessary.
If your product is a short-term solution or accessible only to a flow, your company won’t last in the cut-throat competition the business and technology market has to offer.
You should also think about cost-effective marketing techniques as there is no use in having a large target audience but not the means to reach them.
Step 2 – Penetration Rate
Penetration Rate is to be assumed based on the category and type of the product or service you are selling. Assume a high penetration rate if your product or service is specific to a global purpose and assume a low penetration rate if your product or service suits a customized or specialized purpose.
The penetration rate helps analyze the market needs in-depth and the level of development. It can be calculated by the ratio of the number of users of a product or service to the total target audience of the said product or service.
Step 3 – Divide your target market into approachable segments
Market segmentation helps you design and sell your product according to the desired needs of your target customers instead of shooting an arrow in the wind.
There are several ways to divide your target audience into segments like Psychographic, Demographic, Behavioral, and Geographical.
Psychographic – This explains WHY a customer buys (or does not buy) a product or a service. It divides customers into social groups based on their social features.
- Group 1 – Young, rich, straightforward, unwitty.
- Group 2 – Professional, traveling, middle class.
Thus, these social positions and features common to people of a certain group help analyze the market and in identifying target customers.
Demographic – This explains WHO your target customer is. It gives you information like age, marital status, income status, and so on.
Behavioral – This method is very popular among personal items like clothing and fashion, beauty products, personal care products, and so on. It explains why the same product can give different rates of satisfaction to different customers.
Geographical – It focuses on the customer needs based on where they are located. This also helps analyze if the product can be made available at all desired locations in a cost-effective manner.
4. Apply market size data
Though there is no bulletproof method for market size analysis, all you can work on is bettering your assumptions related to your market size over time.
Every time you make an estimate, examine each assumption keenly. You must also consider the best-case and worst-case scenarios and prepare for setbacks well in advance.
This helps in avoiding overwhelm and finding practical solutions to your problems. Over time, you must keep a check on your assumptions and try to better them with time. This will only happen with experience and in-depth research.
5. Identify competitors
As unique as you might think your product or service idea to be, there is always an undeniable chance that a similar technology exists, thus resulting in competitors and rival companies having the same target audience as you.
Thus, it is crucial to do a market size analysis and have detailed data on who your competitors are, their penetration rate, technology, and accessibility of their products. This helps in analyzing the viability of your own product or service.
If you discover any lacks in the working models of your rival business, you can focus on providing solutions to your target audience around those limitations and make your product a better fit in the market.
However, there are chances that your rival businesses have it all covered, making it more difficult for you to enter the market.
Also, Identifying your place in the market and your potential competition helps investors analyze their share in your business. Thus, you should always have all the strong suits of your competitors in your business and more, making your product or service full-proof.
Here are easy steps to identify your competitors
Keywords – Most customers find the products or services they require by simply typing them on search engines like Google. Tools like Semrush help you get information about who is competing in the market for the same or similar product in the market. Furthermore, these tools give you data and insights indicating which businesses are currently ranking on search engines and are your biggest competition.
Check out the complete Semrush review here to know, how this tool can help you in identifying your competitors.
Market Research – Simple research about your product or service on search engines like Google will land you all the information about people already selling them and their place in the market.
Take a look at the complete market research guide that will help you in your research.
Social Media or Community Platforms – This is the age of social media. Gen Z and social media influencers recommending a product or service have a major influence on the audience, thus increasing or decreasing sales. Thus, customers often post about their needs, testimonials, and feedback there. They also seek recommendations on such platforms.
6. Reaching your customers
Finally, after accessing your market size analysis, identifying target customers, and identifying the market size of a product, you will need to find a cost-effective way to reach your customers.
Some common ways to do this are having a marketing team, hiring your own sales force along with an outsourced sales team, focusing on distributors, online selling to make the product easily accessible, etc.
Thus, you have to find a way to make your product accessible to all. Here are the best methods to reach your target market –
Social Media – With the increase in the rate of social media usage in the business industry, platforms like Twitter, Facebook, LinkedIn, and Instagram are great options to connect with your potential customers on a large basis. Paid advertising campaigns and ads on these platforms are yet another effective way to market your business to both investors and potential customers.
Keyword research – Keywords are very essential to rank on search engines like Google and Bing. You can use free tools like Google Adwords and Keyword Planner to find short-tail and long-tail keywords for any desired topic and optimize your content accordingly.
Cold Emailing or survey – Cold Emailing can land you huge clients for your products or service if well-pitched and targeted properly. Again, to find a list of potential customers to use this method, you can use social media platforms and hashtags.
Focus on customer relations – This is yet another indirect method to increase sales by connecting with your customers on a personal level and building a strong network and trust which will eventually not only increase your conversion rates but also gain your returning customers. This process is time-consuming, however, you should not completely discard it as customer relations are very important for the bigger picture.
Market size calculation, identifying your target customers, top-down market sizing, and market size analysis are crucial before you begin to launch your product in the market. These basic yet important steps help in identifying competition, creating a product-market fit, and thus also in pitching for crowd-funding or angel investors.
However, though all these steps are equally important, the topmost important step is accessibility. You must make your product or service accessible to each and every customer in order to rule the business field.