Market Size

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Market Size In order to determine market size a business also needs to identify the target customer. "Knowledge of the customer enables you to determine the market size and what determines their buying decision. It provides information that will help you choose a location, determine the product or services to offer, establish pricing, and plan a selling strategy" (Guide, 2006). There are many methods that can be used to determine market size. One common technique is to use the following formula: "Market size = number of buyers in the market x quantity purchased by an average buyer in the market per year x price of an average unit "(How to Size a Market). Another procedure for determining market size entails the use of outside information sources. Examples of outside information sources include government data, trade associations, financial data from industry experts, and customer surveys.

8 Steps to Determining Market Size
By analysights

Whether you’re an entrepreneur writing a business plan or an established firm looking to introduce a new product or service, you will encounter the need to estimate the size of the market/s that you plan to serve. Market-sizing is an interesting and exciting branch of marketing research, but it can be almost as much an art as it is a science. Today, I will walk you through the process of estimating market size, using the example of a financial planner looking to develop a practice in his community. Step 1: Define your target market This can never be stressed enough. If you don’t know the type of customer you want to serve, you will waste a lot of time and money trying to get any customers. Market-sizing is easier when you know the exact group you’re searching for. Our financial planner has decided that his target market will be married couples with young children. Step 2: Determine the needs of your target market and how they create demand for your product/service Here you formulate a hypothesis. Ask yourself the benefits your product or service offers your target customers. What problem does your product help them solve? Begin with a statement about why your target customers need your product. Our financial planner’s statement might be: “Married couples with young children need my services because they must be prepared for college, as well as for unexpected emergencies such as disability and early death.” This statement assumes, of course, that the financial planner

sells financial products that address these needs; if the planner sells only financial plans, his statement will be different. Step 3: Identify the information you need to estimate the size of your market Now that you have identified your target market and hypothesized about its demand for your product, what information do you need to develop your estimates? Among other things, our financial planner would need to know:
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The age distribution within the geographic area he serves; The number of households with children in that area; The distribution of family income in that area; Home market values in the area; Educational attainment and college enrollment rates for graduating high school students; How many competitors, direct (other financial planners and insurance agents) and indirect (stock brokers, banks with financial planning services, etc.) are serving the market; and What financial planning services people buy and how much they pay.

There are others, but this list is pretty comprehensive. Step 4: Identify the sources you need to obtain that information So where do you find information about your market? These days, there is such a wealth of published statistics about almost every industry and market segment, that a combination of library and online research can fulfill most of your information needs. In some cases, if you are looking for very specialized information, you may need to conduct your own primary research (surveys, focus groups, etc.) to get what you need. The U.S. Bureau of the Census provides comprehensive demographic statistics by metropolitan area, county, ZIP code, census tract, and state. Information about population, age, income, educational attainment, presence of children, and home market value can easily be obtained at any of these levels, so the financial planner would be able to answer many of his questions. In addition, the Census Bureau also produces County Business Patterns, which provides information about the activity of each industry by each of the same geographic levels listed earlier. Hence, our financial planner can also obtain the number of financial planning establishments, insurance agencies, and brokerage firms serving the area in which he hopes to establish his practice. In addition, our financial planner may consult online data sources such as Dun & Bradstreet’s Million Dollar Database and ABI’s ReferenceUSA to identify specific financial planning firms and insurance agencies in his area and get estimates of their employment size and revenues.

The financial planner can also get lots of relevant information from trade associations, local chambers of commerce, Web sites of his existing competitors, and through primary research, such as surveys and interviews with experts. Step 5: Collect the data Now that you have identified your data sources, you need to extract the data. The financial planner will scour all the sources he identified to pull out data that meets his information needs. He will determine whether his data sources provide sufficient and useful data, or whether they provide insufficient or suspect data, at which point he may seek out additional sources to answer his questions. Step 6: Analyze the data Now that you have all the data, what does it mean? What is it telling you? Let’s say that the area our financial planner wants to serve has 200,000 households, of which 15% – or 30,000 – are two-parent households, with a median family income of $60,000 per year, a median age of 32, and an average household size of 4. Immediately, the financial planner knows he is serving a young upscale market, and it’s very likely – without looking at the number of competition – that there will already be an above average number of financial planners trying to serve them. The financial planner may also find from financial planning industry statistics that 60% of families in that age group carry life insurance, and that the average policy face value is $100,000. Given the affluence of this area, the planner may reason that households in his target market have much greater assets and income to protect, so he may adjust his estimates of life insurance coverage for that area upward – to policies of maybe $250,000 or $500,000. He’ll make similar estimates for any other financial products and services he offers. Step 7: Derive your market estimate Now that you’ve compiled and analyzed your data, you need to come up with an estimate of market size. Our financial planner may – through all his data sources – come up with an average and standard deviation of the policy amounts of life, disability, and other policies aimed at his target market in that area. He will then project that amount out by the number of households within that market to come up with an aggregate size of the financial planning market in that area. From there, he will build in a margin of error, perhaps using a 95% confidence interval, to come up with a low estimate, a middle estimate (which would be the aggregate size he determined earlier), and a high estimate. Step 8: Apply your estimate Your market size estimate is useless if you do not apply it. Once our financial planner derives his aggregate estimate, he will estimate how much of that market he can

reasonably get based on his competition and the amount of money he can earn based on his commission structure. This will feed his business plan projections. In addition, the size and characteristics of this market will help our financial planner determine how best to market his services, whether by direct mail, giving presentations, networking, or other means. Market-sizing can be a daunting, tedious task, but the value it adds to your planning and marketing efforts can make the time, money and effort invested in it more than worthwhile.

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