Design Management Group

Market size estimation: end-user demand

Removes preconceptions about the size of a market based on historic sales and focuses the mind on the potential market for a product or service. Can be difficult to make estimates when there is little experience of the market.

Description

When operating in known markets, there is a danger of considering the market size as the 'installed base' of a product. This is not the same as the true potential end user demand. When exploring new markets, it is useful to take a 'top-down' approach to sizing the market and evaluating the market trends. It is unlikely that there will be accurate data to size any specific product or niche market and the cost of making highly accurate estimates can be high. However, it is likely that reasonable estimates can be made based on available data.

The market for any product van be viewed as a fraction of the overall target population. The trick is to define the target population(s) and make dependable estimations about the likelihood of individuals or groups within that population purchasing the product. Taking a top down approach, the target population can be established by a process of narrowing down larger populations.

Understanding market segmentation is central to making effective estimations of market size. Some tips include:

Define the maximum possible population

Define the population which encompasses the largest proportion of the potential end users. For example - all pensioners, women over 30, manufacturing companies etc. This represents the largest possible target market in the unlikely event that 100% of the population buys one product. This will help the team to clearly define the marker of interest.

Define the sub-populations

Within the overall population, are there sub-populations of interest? For example, within the domain of manufacturing companies, maybe only those of 250 people or more are of interest. This may be further refined to isolate specific sectors. Within each sub-population, it is likely that only a small proportion will be interested.

Consider analogous markets

If data is not available directly, are there any analogous markets. For example, if you are selling machine tools, is there a relationship with the market for steel or usage of electricity. If you are selling water filters, is there a relationship to water consumption or maybe the sales of kettles. Are there any associations between the purchase of one product or another? For example, commercial vehicle production statistics may be related to the demand for truck tyres.

Identify uncertainties

How confident are you in your assessments? Make sure assumptions, extrapolations and uncertainties are made clear.

Notes

Effective estimation demands good investigative skills and creativity on behalf of the team.