Market sizing is the process of estimating the potential of the market, product, or service. Understanding market size and analyzing the ability to penetrate the market is very important for any venture or startup. Market sizing helps in decision making by helping in following ways:
Analyzing market opportunity: It is really important to see if the market for any product/ feature is big enough to invest enough time and resources into the product development process. If the market opportunity is too small you can't make business irrespective of how great your product is, thus market estimation becomes a really important step in developing a product roadmap.
Estimating funding and development path: Analyzing the market potential can help in estimating costs associated with development, sales, marketing, etc. This can influence the funding required for product development.
Prioritizing the target audience for the initial launch: Market Estimation is a great way to figure out the target audience for the initial product launch. Often, a product might cater needs of two different user types, having a market estimation can help figure out a better opportunity and help the team optimize the product accordingly.
There are two common approaches to thinking about market sizing:
Top-Down Analysis
Bottom-Up Analysis
Let's first discuss the Top-Down Analysis.
👇🏻 Top-down Analysis:
A Top-Down approach involves calculating the total market size and then consequently applying filters to reduce your addressable market. In this approach, we make assumptions with respect to the market penetration rate and come up with a good estimation.
Let's take an example of an ed-tech firm that plans to roll out Learning Management Product X in the K-12 Schooling Sector. The firm is targeting private schools which has computer labs with internet facility in India.
The market for product X can be calculated as follows:
Total no. of schools in India | 15,00,000 |
Private Schools | 30% |
Schools with internet facility | 75% |
Penetration Rate | 5% |
Schools in our Sweet Spot | 16,875 |
Market Estimation through this approach is overly optimistic and subjective to assumptions made with respect to penetration rate. Also, we tend to miss out on key factors which can influence the final estimation results. A better way to look at the estimation problem is bottom-up analysis.
👆🏻 Bottom-up Analysis
The Bottom-up approach works opposite to the Top-Down approach, rather than starting with the total market size we start by estimating potential market segments to calculate the total market opportunity.
In this technique, we will analyze where the products can be sold, what are major product competitors, what is our competitor's sale, and finally what slice of the sale can we carve out.
So let's walk through the bottom-up analysis for product X:
Where do customers find similar products? In the case of Product X, our end customers are schools and education institutes and so they can find software products on Search Engines, App Stores, Online Market Places, etc. You focus on products listed in search engines for now, since that is the most convenient way to learn about a product
What are your major competitors? While surfing the web and conducting competitor analysis, you are able to find the major competitors operating in the industry. Ensure segmenting your competitors according to industry. Next, you find the total number of schools catered by your competitors and compute the total volume of sales done by all competitors in the given segment. Now, we assume the percentage sector fit for each segment to calculate the total addressable market for our product.
Sector | Total Competitor Sale | Sector Fit % | Total Schools |
ERP System | 20,000 | 25% | 5,000 |
Online Learning Apps | 100,000 | 5% | 5,000 |
LMS Softwares | 10,000 | 75% | 7,500 |
CMS Systems | 30,000 | 50% | 15,000 |
Total | | | 32,500 |
What can we carve out from the market? After a detailed analysis of competitors, market segments, and sector fit, we need to find the total estimate for our product. Assuming we carve out 8% of the total market from our competitors we can estimate the market potential for product X. The math is easy, the estimated market potential for product X is 2600 schools.
Tools for Market Estimations:
Market Sizing and estimations involve plenty of research and analysis. One can start by obtaining data from publicly available sources of information such as:
Industry Reports
Surveys
Business acquisition reports
Demographic Reports
Online Traffic Studies
The following tools can be further helpful in conducting competitor analysis and market sizing:
👉🏻 Conclusion:
While the top-down approach is very easy to use and can provide results in no time, the estimation is generally over-optimistic and hence can provide a false market opportunity.
On the other hand, the bottom-up approach involves a lot of complex calculations and market research, but towards the end, you get a more realistic market estimation which can help in better market analysis.
The best way to approach market estimation is to conduct extensive market research, take realistic assumptions, and use multiple approaches to get honest and unbiased results.