CALCULATE THE SIZE OF YOUR MARKET

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"Don't look for a big market today, look for a market that will be huge tomorrow".

The size of your market matters a lot

Identifying the size of a market is of great importance for three main reasons.

1. It will give us an indication of how attractive such a market is for a new company. 
2. It is a variable that will allow you to identify the real potential of your project, which is essential for entrepreneurship.
3. From a strategic business point of view, you may encounter a variety of scenarios.

What happens if your sales go up and the market goes down?

You will be in a good situation because you will be gaining market share. If you sell more than last year and the market is growing at a higher rate than your sales, then you are in trouble because what is happening is that, by selling more, you have lost market share. But it can also happen that your sales stagnate or decrease while the market declines further. You will be less upset because by decreasing sales you have gained market share. That's why losing sight of the market can unwittingly lead you into undesirable situations!

Market sizes are measured from different points of view, but the ones you as an entrepreneur are most interested in are:

MARKET SIZE IN STANDARD UNITS:

All markets are expressed in units, hectolitres, tonnes, barrels, etc.

MARKET SIZE IN ECONOMIC VALUE:

• How much the market is worth in current currency or what its turnover is.
• It is the result of multiplying standard units by the price of the unit.

AVERAGE PROFITABILITY:

• Every market has a certain profitability ratio, a difference between costs and revenues that will be different depending on the segmentation.
• Logically, the luxury car segment is more profitable than the family car segment.

These indicators alone may not mean much. It is necessary to take a dynamic view of how these markets are evolving. A large market that does not grow year on year may not be attractive to a venture. It will depend on your ability to add value and differentiation to your product.

In general, they tend to be saturated, highly competitive markets, with a high price sensitivity. Red oceans in short. On the other hand, an apparently small market with high year-on-year growth rates may be more interesting and offer better opportunities in the short, medium and long term.

How do I know what a market measures?

A few years ago, knowing the size of a market was a difficult task. Nowadays, there are tools for measuring markets and the internet is an inexhaustible source of information that allows us to assess the size of a market or even obtain concrete information about it.

Who has an easier time measuring markets?

They are those companies that contract panel research services carried out by specialised organisations. Nielsen is an institute dedicated to providing daily information on the behaviour of mass consumer markets (supermarkets, specialised chains, etc.).

The information provided by Nielsen goes far beyond market volumes. It provides data related to distribution, share, market share, etc. It is a very important marketing tool for companies in this sector.. If you want to start in the mass consumption sector, you can hire a Nielsen "snapshot" for an affordable cost that will give you a very clear view of the situation in a lot of useful variables and also with an evolutionary view of the market.

Others, who do not have it so easy, have to resort to secondary sources such as the internet, sector publications, chambers of commerce, production and import statistics, etc. All these sources simplify the process quite a lot and with a bit of common sense you can easily estimate the size of your market. Publications such as Alimarket provide information on a lot of useful and interesting sectors. You might find the information you are looking for.

In this link you will find information about the Spanish technology sector. But there are many other sources in this sector. Some markets are very difficult to measure, so you will have to resort to weightings based on benchmarks you know. Domestic cement production and imports can give you clues about the construction sector. The number of diabetics has been used to weight sugar consumption in many third world countries.

You can use comparative weightings with other countries or regions with similar habits. Using ratios can help you.

• For example: The Canary Islands account for 4.3% of the national market. At least it is a reference that you will have to cross-check with information you find locally.

Market estimation variables:

We will distinguish between Total Addresable Market (TAM) and Potential Market (SAM).

TAM - TOTAL ADDRESABLE MARKET

It serves to analyse how big the business opportunity is, or in other words, its full potential if you later succeed. To calculate this for more or less well-known markets, we can either add up the turnover of all major competitors globally, or refer to existing studies where the market size is indicated, or follow both options.

If this information does not exist, often the best we can use are guesstimations (or bottom-up estimates) to reflect on and get an idea of the total demand potential of the business.

• For example: we are going to use the car market.

Imagine we are going to set up a platform to sell sports cars online. Our TAM would be the global passenger car market, which accounts for approximately 79 million units per year.

POTENTIAL SAM - SERVICEABLE AVAILABLE MARKET (SERVICEABLE AVAILABLE MARKET)

It provides an idea of the size of the market that we can reach with our technology and current business model. In other words, it is your target segment. It serves to assess the growth potential of the company under current conditions, i.e. offering the services and products we have defined. Continuing with the previous example, the SAM of this business would be the number of annual units of sports cars that would be sold in the market. sold via the Internet (i.e. what we could achieve at most with the current business model).

Since it is difficult to make this figure available, we have to make a guesstimation as follows: the percentage of sports car sales over the total number of passenger cars is 5%, so we are talking about 3.95 million units per year. If we know that 3% of these are sold online, we would say that our SAM is 118,500 units. 

Market share then appears, which is the market share that we can achieve:

SOM (Serviceable Obtainable Market)

A sales estimate is defined as the amount of product I will be able to place on the market under specific conditions and marketing stimuli.

Specific conditions, or market characteristics, include:  ttendencies to grow, decline to stagnation or volatility.

SEASONALITY

The evolution of sales is regular throughout the year or is concentrated in specific periods (Cava or suntan lotions).

PRICE SENSITIVITY

Price sensitivity is a fundamental concept that affects the volume and value of the product, as it marks what your customers are willing to pay for your product/service in question.

NEW PRODUCTS ON THE MARKET

Launch of new models or innovations such as electric cars. The same is happening with the switch to electric cars.

OTHER FACTORS: THE ECONOMIC SITUATION, LEGISLATION, ETC.

Marketing stimuli are all those actions that I am going to carry out to sell my product: advertising, sales promotion, pricing policy, SEO, SEM, etc. The market share will be the number of units you manage to sell in relation to the total sales of that category. It is the slice of the pie you get with those resources.

At this point, we are talking about establishing your sales estimate. We are therefore talking about a strategic decision in which it is not advisable to make a mistake, at least not by excess. Following the example, we could state that given the conditions of stability in the market and our marketing actions, and by using some method of sales forecast we think it is reasonable for us to sell 450 cars in the first year, 900 in the second year and 1500 in the third year. 

In a nutshell, according to our example, we would have:

• TAM: 79 million pcs/year (cars).
• SAM: 118,500 units/year (internet sports cars).
• SOM: 450 pcs/year (what we plan to capture, first year).

The usual way to represent them is with concentric circles, style: