For most businesses, the concept of market sizing is readily understood but not easily accomplished. Many get stuck on establishing boundaries or defining the market before they even get to the data analysis and implications of their research. Determining market size can answer strategic questions about levels of investments in the business and profitable growth targets. Market sizing can also serve as a quick understanding of the potential for a B2B market opportunity in terms of volume or value, and is therefore pertinent to business strategy and decision making more.
Below are the 5 basic steps in estimating market size.
1. Defining the Market
Knowing the level of detail necessary to approach your strategic questions is the key to properly scoping your market sizing approach. Defining your target market should always be the first step in estimating market size, and it is critical that you do not stray from your determined market definition through the data collection process.
Market size can be viewed in terms of Total Available Market (TAM), Served Available Market (SAM), and Share of Market (SOM). Total Available Market refers to the combined revenue or unit volume in a specified market. Often a company or investor will require the market size or Total Available Market for a particular geographic area. If we take the example of food packaging, the Total Available Market can be calculated by adding sales of food packaging producers in a particular geographic region or market segment.
The Served Available Market refers to the percentage or size of TAM that a company can reasonably serve based on product, technology and geographic constraints. SAM typically will be less than TAM. Using the same example of food packaging, if the TAM for food packaging is $200 BN, then the Served Available Market for companies making flexible packaging would be only a percentage of TAM. Lastly, Share of Market or SOM refers to the percentage of SAM that a particular company currently serves or plans to serve. Again, SOM should be less than SAM except in the case of a monopoly.
In your market sizing process, start by determining what products or services should be included as part of your TAM. Then narrow down by geographic scope—US, North America, Europe, etc. Another factor to consider is the timeframe. Are you looking for historic market sizing or future projections? By defining what should be included in your market sizing estimation, your company can more accurately determine the market potential and the estimated available share of the market.
2. Determining Your Approach
There are two basic methodologies for determining market size: top-down and bottom-up. Your selected approach may be based on what market information is available. However, the best approach is to develop market sizing estimations using both methodologies in order to gain a higher confidence in your estimation.
The top-down methodology uses a broad market size figure and determines the percentage that the target market represents. For example, to determine the TAM for food packaging, you might start with retail sales of packaged food and multiply by an assumed packaging cost (e.g. 10% of the total retail food value is packaging cost). In general, a top-down approach is typically a quicker, more time efficient approach. It is great for validation or a quick assessment of market size but seldom will provide the detail necessary for a true opportunity analysis.
The bottom-up methodology builds the TAM by totaling the main variables of the target market. Using the same example of food packaging, a researcher might total the food packaging sales of packaging producers – all food packaging or by package type or by geography. This method is generally considered to be more accurate and takes considerably more time to complete. As a result, the bottom-up method is a more valid estimate because it is less likely to include non-addressable revenue or units.
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