If you are putting together a business plan before approaching lenders, you’ll want to be specific in your calculations about your market share. Figuring it out takes time and research, but is well worth the investment. It helps not just for financing, but also when you make product development, marketing, and manufacturing decisions.
Understanding Market Potential
The potential of the market rests with what is needed to solve a problem. Listening to music is an excellent example to illustrate how to understand a market’s potential. In this instance, the problem is: how can a music lover listen to their favorite music affordably and conveniently?
Through the years, methods have included using Victrola records, long-playing records, singles, cassettes, CDs, MP3s, and products like iPods and Beats headphones. With time, new technology will become the norm.
The “market” isn’t necessarily the product: namely, an iPod or Beats headphones. The market is the music lover. The opportunity depends on how many there are, and how much of the market you can realistically expect to capture. This recurs over and over in every type of market: personal, home, office, agricultural, and industrial.
You will not go down the wrong path if you keep your eye on the problem and its solution. You can miscalculate the size of the market if you focus on one type of product and the numbers sold. Do that, and you will miss the wave when new technology comes along, as it always does. Remember, you are sizing the market, not the product you are selling.
Identifying Your Niche and Segment
Once you have identified the problem and corresponding solution, you can move on to the next step: defining the market niche you want to serve by identifying your target customer and market segment.
For instance, if your overall market is providing customers with pool cleaning supplies and equipment, you can break that down by eliminating people that wouldn’t be interested in your product. That might include homeowners who are too busy, like families where both parents work. Another group to eliminate might be high wealth households that might hire a pool cleaning service to handle the task.
Keep trimming. Eventually, you might end up with quite a small market. Many successful businesses appeal to only a small fraction of the market.
Estimating Your Market Share
Now that you have determined the problem, the solution, and your niche, you can use traditional methods to compute the size of a market. There are multiple approaches to zero in on a good market share estimate, including governmental databases, surveys, industry studies, and competitors.
For starters, find out the number of people or businesses that need your product or service. Resources to help you estimate this include the Small Business Administration, industry associations, and statistics kept by the federal government.
Pinpoint companies that sell the type of product you want to market. Then start asking questions to see how close they are to the kind of business you wish to become.
- What does their typical customer look like?
- How much does their product cost?
- What type of service is offered, beyond an actual physical product?
- What technology is needed to produce and deliver the product to the consumer?
This will give you a list of companies that you can reasonably assume are your competitors. Next, find out their annual sales.
- How much of that could you tap into as a startup?
- Would 10% of that market provide you with sufficient living income and offer enough room to grow your business?
Figure out a realistic estimate of how much of your competitors’ market you can attract. This is a very rough guess as to your market share.
Check your estimates by conducting surveys of individuals who buy these products. You can do this yourself by setting up a short, free survey online or by hiring a company that specializes in them. Keep in mind that interest in a product and service is not necessarily action in buying the product or using the service.
Sizing the market is an important task for market planning and budgeting for all startups, and all along the way throughout a product’s lifecycle. Markets change, however, sometimes quite rapidly, so market size estimates should be considered fluid numbers.