Building a successful startup goes beyond developing a product or service—you must be sure you are diving into a profitable market, and your product can cater to consumers’ needs.
Calculating your market size helps you know if the market is ready for your product. It also gives insights into the number of potential customers you’ll sell to and how much profit you can make.
Essentially, market size is how to know if your brand will succeed and how to prepare, making it a crucial process for every startup. It’s also one of the important figures your investors and partners need to know before committing to your business.
So, if you are about to launch your startup and unsure if figuring out your market size is the next big step, you are in the right place.
This article discusses why market size is critical for every startup looking to set out successfully.
Let’s dive right in.
What is market size?
Market size is the number of potential customers to sell your product or service and the total revenue you can generate from these sales. For example, if you sell hiking boots, your potential customers could be the people in a community group of hikers.
As a fitness trainer, your possible market size could be the number of people jogging on the highway or the number of users searching for fitness trainers in your location online.
There are two prominent types of market size to keep in mind when learning how to calculate market share. Then, there’s an additional stage that can benefit the process. Let’s examine them below:
- Total addressable market: Total Addressable Market (TAM) is the first market size to calculate. It evaluates if your potential market is large enough. It is also the total revenue or profit you’ll make if your startup is 100% successful.
- Target or available market: Segmented Addressable Market (SAM) is the market size your startup can achieve in the future. It is a fragment of the total addressable market.
- Expected market share: This is an additional stage of the two market types. It helps in understanding what segment of the market you want and your expectations for your business. It is also called the Expected Share of the Addressable Market (ESAM).
Major components of a market size
Below are the essential elements an adequate market size entails. They include:
- The total potential size of a market
- The significant competitors in a market by category
- The composition and profile of a target customer
- The products/services available in the market
- The most important trends in the market
Top reasons to calculate your market size as a startup
There are several ways to figure out your market size potential to grow your startup business. Let’s examine the most prominent perks of calculating your new business’s market size.
1. It helps you develop an effective market strategy
Research reveals that businesses that proactively plan their marketing are 331% more likely to report success than other marketers. The market size provides the essential data required to create a solid marketing strategy before launch, increasing the chances of success.
Understanding your potential market, how big it is, and how much you can make from it will set you on the right track for your marketing plan.
The roadmap refers to when making major business decisions, including the type of product to develop, what to improve, and the marketing techniques to attract and sustain consumers’ interest.
It also enables targeted marketing that produces fast results. Since you know precisely your target audience, you can narrow your efforts to this specific group of people rather than targeting everyone.
As a result, you’ll experience a quick turnaround with your marketing, allowing you to scale your startup faster.
It also influences significant choices during the early stage of your startup, including:
- Location: Your market sizes will help you know where your potential market is. For example, are they located in the suburbs or urban areas? What social media platforms do they use the most? Etc.
- Pricing: Understanding the number of customers and income you”ll generate from the products you sell helps you select appropriate pricing for your goals.
- Product development: Since you know your market, you’ll know what they need and how to structure your product to suit their needs.
- Raising capital: Market size lets you know how much money you must raise to launch your product successfully. You’ll see the amount you need to develop the correct number of products for your market size.
2. It reveals products’ feasibility
Many startups fail because they don’t calculate the market size to know how viable their product is. A business idea may be great, but it may not be what a market needs at a particular period.
If the market is not ready for it, there’s a high probability that the product will fail no matter how good it is. But this is where the market size comes in. It reveals how practical a business idea is before launch. It helps you discover if there are enough people in need of a product and if it’s a worthy investment considering its ROI.
By examining the startup’s market opportunities and profitability, you will know whether to turn your idea into a business or wait till the market is ready. Identifying a “go” or “no-go” decision early through the market size prevents future losses and helps you channel your efforts into what works.
3. It gives you a competitive advantage
Calculating market size provides critical data that puts you ahead of your competitors. You can work with the insight discovered from calculating your market size to develop strategies that keep you ahead of the game.
First, it reveals precisely who you should be targeting. So, while competitors without a market size are trying to sell to anyone, you will channel your marketing efforts to a segmented audience, facilitating results.
Also, it helps you discover the segments of the market your competitors are neglecting, so you can harness the potential.
Finding these gaps in the market enables you to create unique offerings for a targeted audience, helping you stand out and gain a competitive advantage over other startups.
You can differentiate your product from your competitors by highlighting your business’s unique features when you know your specific market size.
For example, if your competitors focus on selling multiple products to the customers, you can distinguish your brand by offering a particular product of the highest quality. This portrays you as an expert in the industry and differentiates you from other businesses vying for attention.
4. It attracts investors
Potential investors and partners want to know if your business is worth their investment, and market size shows how feasible and profitable your startup will be. If investors see the number of customers waiting for your product, they can determine how beneficial it will be.
Additionally, a market size lets you map out a market plan, allowing you to highlight your goals and how to achieve them. It’s easy to convince your partners and investors your business is their best bet with a working plan. This way, you can win them over and generate enough capital for your business.
5. It enables better accuracy with pricing, supplies, and distribution
Knowing your market size helps you make accurate decisions to get the best results. You will learn the suitable pricing packages to set considering the number of potential customers and their demographics. The same applies to product quantity produced and how you distribute them.
Accurate pricing, supply, and distribution will help you hit your goals faster. Contrarily, wrong decisions can generate losses and hamper your plans. Therefore, understand your market size to make correct choices that move your business forward.
What to consider before calculating market size
Here are two significant steps to take before calculating market size:
1. Set questions
Define your goals before calculating your startup’s market size. The best way to do this is to set specific questions you want the result of the market size to answer.
These questions may include:
- Should we invest in this product or market?
- Should we increase or decrease our investment in this business idea?
- Is the market big enough to generate the profit we desire?
- Is the market evolving or static?
- What does the market look like in the next few years?
These questions will help you set clear goals when calculating your market size. So, you can determine if the market is profitable to venture into by asking these questions.
2. Be objective
Develop an objective mindset and approach to calculating your market size. Remember, the market size’s result is to identify if the market is worth diving into or not.
So, be open-minded throughout the process, understanding that the result will help you make the best decision. So, it’s best to retreat and restrategize if the market size shows the business idea won’t be profitable.
Note that the market is constantly evolving, and the results are not static. There are chances the market will be profitable in the future, even if the current stats aren’t promising. So, sit back, monitor the trends, and identify the best time to launch.
Determining your market size is crucial to launching a successful startup. This article discussed why calculating market size is essential for new businesses.