You may have heard the age-old question on Dragons Den – ‘how big is the market?’ – at which point the entrepreneurs either fumbles or quotes a massive number in the hundreds of millions to billions of pounds.
So, why is this important and how do find out this number for your business?
Why is market size important
Market size shows you the potential maximum size of the business opportunity. It’s the value of 100% of the market you are targeting. Realistically, you won’t achieve 100% unless you end up being a monopoly, however, for a high-growth ambitious business, it is important that there is sufficient headroom for growth year on year.
Market size is the number of individuals in a certain market segment who are potential buyers.
It’s a key metric that investors will look at to ascertain if they can make their desired returns. If they’re investing £100k but the maximum potential for the business is only £1m – it immediately would ring bills that it isn’t worth it given the likelihood of failure and chance that you’ll ever achieve 100% of the market. That is why investors typically prefer a market size that is at least in the hundreds of millions if not billions.
However, even if you aren’t looking to attract investment – it’s still very important for you to understand that so you know how much is worth investing into the business (time or money-wise) and so that you can build your business goals around this. By going through the exercise of calculating your market size, it will help you better understand your demographic which should help shape your marketing strategy.
How to calculate your market size
Many entrepreneurs will quote headline figures as their market size, as that is what they have been able to find on the internet – eg. Health food in the UK is worth £773m a year. Whilst this may be a large great attention-grabbing number it will, however, include a multitude of products which are not relevant to you (in the above example of Health food it will include vitamins, supplements, free-from foods, sports nutrition, weight-loss products etc). Quite often such number is an estimated accumulation of all the sales in that product category across the whole industry.
Health food in the UK is worth £773mMintel, March 2020
There are two key ways of calculating your market size; ‘top-down’ and ‘bottom-up’. We shall continue with the health food example, and assume this business is selling Vitamins.
We now know the overall market is worth £773m, and further research shows us that ‘Vitamins and Supplements’ make up 34% of this market – so this would give us an actual market size of £263m. We can continue to refine this assumption by drilling down on our niches (vitamins for a certain age bracket, with a certain health condition etc) – which will give us a more and more accurate (albeit smaller) number.
The bottom-up method is a lot more specific to your business, and it requires you to carefully think about who your market is by defining your demographic. Here, you’re calculating the potential number of customers or transactions multiplied by your selling price. Though more cumbersome, we believe where possible, this can be a better measure of your market size. So, you’d start with your population as the starting number and keep refining this:
UK Population (66m) x Gender (All – 100%) x Age (16+ – 80%) x Household Income Bracket (40k+ – 29%) x Consumer Interest (64% of UK consumers have bought health products ) = Potential number of customers (9.9m)
Next step is understanding your pricing and how often customers will buy this product (say £15 and every 3 months – £60 per annum). So, from this we can establish that your market size in terms of annual spend is nearly £600m (Potential number of customers x Annual Spend)
You could take this one step further and calculate your total (lifetime) market size by using Customer Lifetime Value (CLTV) rather than ‘Annual Spend’ in the above formula.
CLTV is the revenue you expect to generate from a customer over their lifetime. In the above example, a customer spending £15 on vitamins every 3 months might only do so for 2 years as the product. The 2 years, in this case, could represent a change in lifestyle for the customer when the product is no longer suitable or how long you’re able to retain them for. In this case, the CLTV is £120, thus the total market size would become nearly £1.2bn
How &facts can help
&facts is here to help small businesses thrive! So, we’ve created a wonderful and interactive tool that helps you calculate your market size (total addressable market). As well as giving you the ability to play around with your assumptions, see your results in beautiful graphs and charts – it will also show you a sales projection based on your expected growth rate.
We’re currently developing our full-fledged market research platform, which will let you find the answers to your market questions easily and quickly using trusted data. Please sign up to our waiting list and we will keep you up to date with our product development and any other interesting tools we create. We’d love to hear any ideas and suggestions you have!