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How do you estimate market size?

Quantifying the size of your potential market, and specifically what your share will be within that, is a critical task for any startup.

Without this basis it will be impossible to create a business model or develop a meaningful marketing strategy, as well as decreasing the likelihood of securing funding.

Four parameters

To determine your target audience to start with, there are four parameters to define for each ‘candidate’ audience group:

• Scale – how big is the potential audience in absolute terms, i.e. number of individuals, groups or companies that could be served?
• Affluence – how much available spend do they have individually and as a collective?
• Saturation – how much competition is there for this space?
• Affinity – how aligned is the audience group to your Value Proposition?

To determine these you need to do your homework.

Use available reports and research to put numbers against your audience definitions. Given the volume of publicly available data, this shouldn’t be an insurmountable task.

Failing that, there are readily available research tools that can be used to cheaply garner intelligence (check out my Startup Resources directory).

By ranking each group against these 4 dimensions and then seeing which delivers the greatest potential, you can determine which specific audience to target.

The universe

The total number in any group is your overall audience ‘universe’.

You then need to gauge the penetration rate of that audience based on what you believe you can achieve. At first this may have to be an assumption given observations of what other people are delivering in similar sectors.

However, it’s important to test this as soon as possible which can be done through limited media buys (i.e. Google AdWords) to determine response.

If you haven’t got product, use content such as a concept video with data capture to start gaining validation.

Your market size is then simply a question of multiplying your universe by your expected % penetration.

To calculate market value, then multiply this volume by your average basket / sale / lifetime value over whatever period you’re looking at.

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