relevant market size in business plan

The 2 Simple & Straightforward Methods for Market Sizing Your Business

Published: September 21, 2023

When you’re considering a new venture, one of the first things you should do is determine whether there is a valuable market for it.

Discover the methods to calculate your market size and accurately measure your business’ revenue potential .

Keep reading, or jump to the section you’re looking for:

What is market sizing?

Market sizing terms to know, how to calculate market size, market sizing methods.

Market sizing is the process of finding how big your product's audience or revenue could be. So, market size is the total number of potential buyers for a product or service and the potential revenue reach based on that population size.

When market sizing, you're calculating customer numbers to measure the growth potential of your business.

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Why is market size important?

There are several reasons why every business should spend time sizing its market:

• Market sizing helps you figure out if your product is a worthy investment. Say you have a great idea for a product but there are only 100 people who would buy it. From there, you can decide if that population size is worth the cost of manufacturing, production, distribution, and more for your product.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners as well as investors.
• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and their needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set more realistic goals, assign resources, and refine your strategies.
• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market Size vs. Market Value

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to the financial worth or estimated market capitalization of a company or industry. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Before diving into how to figure out your market size, there are a few helpful terms you should get to know.

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base that a company could achieve if it were to capture 100% of market share.

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company's resources, capabilities, and target customers.

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

Check out this post to learn more about TAM, SAM, and SOM and how to calculate them.

Target Market

A target market is a specific group of customers, industries, or segments that a company focuses on. It's the customer segment that's most likely to show interest, purchase, and appreciate a company's products or services.

Penetration Rate

Penetration rate refers to the percentage of a target market that a company has successfully captured. It shows the level of market share reached by a company in a specific market segment or overall market.

If you're a new business, you can calculate penetration rate by dividing your total customers by the number of potential customers in the target market. Then, multiply the result by 100 to get the percentage.

Learn more about market penetration here.

Market Segmentation

Market segmentation is the process of dividing the total market into distinct groups or segments. Usually, the people in these segments have common characteristics, needs, or behaviors.

Segmenting the market can help you better understand your target customers. It can also help you tailor business strategies, like marketing , to meet specific segment needs.

Value Proposition

A value proposition is the unique benefits that a company offers to its target customers. It differentiates a company's product or service from competitors and creates value for customers.

Understanding the value proposition is crucial in market sizing. This is because it can help you find the specific customer segments that will find the most value in your offer.

Try one of these free value proposition templates to draft your value proposition.

• Start with your total addressable market.
• Find a group of customers to focus on within that target market.
• Figure out how many of those customers are likely to buy your product.
• Multiply that customer number by estimated penetration rate.

While calculating market size takes only a few steps, it's a crucial process. The steps below will help you understand the potential demand and revenue opportunities for your business.

1. Start with your total addressable market.

You can calculate your TAM by multiplying the total customers in a market by the annual value per customer. But before calculating, make sure you take a look at the tips below:

• Define your product or service. While developing a product can be quick, growing a business around a product is more complex. It's important to clearly understand your product or service and how it solves a problem or meets a need in the market.
• Find your market category. Some products fall within more than one industry or market category. This is the first step that will narrow your TAM. So, think carefully about what you expect customers to compare your offer to.
• Conduct market research. Gather relevant data and information about your potential users. If you're new to market research, check out this free market research kit , with research and planning templates.
• Analyze the competition. Conduct competitive analysis to figure out the market share and unique value of your top competitors.
• Define your total addressable market. With the research and analysis you've pulled together, create a realistic TAM estimate.

2. Find a group of customers to focus on within that target market.

Dig into the tips below to quantify the top customers in your market:

• Create your ideal buyer persona. Use the Make My Persona tool to outline the characteristics, demographics, and behaviors of your ideal customers.
• Segment your target market. Start dividing your target market into distinct segments. You might base segments on factors like age, location, interests, or buying behavior.
• Continue market research. Continue collecting data and insights about each segment. This will help you understand how big each segment is, as well as their needs, preferences, pain points, and purchasing habits. Your ongoing market research might include surveys, interviews, focus groups, or analyzing existing market research.
• Set pricing for your product or service. For some products, pricing is a deciding purchase factor. So, if you haven't already, set pricing or a price range for your products.
• Assess segments of your market and prioritize . Think about each segment's size, growth potential, and competition. It's also a good idea to think about how each segment aligns with your company's capabilities and resources. In short, don't just focus on segments that offer the most attractive opportunities. Make sure they align with your strengths and needs.
• Refine your buyer personas. With your prioritized segments, take another look at your ideal customer profile. This will give you a more useful buyer persona for your marketing and sales strategies.
• Confirm your SAM with market testing. Test your target segments with a product or service pilot group, measuring their responses and feedback.

3. Figure out how many of those customers are likely to buy your product.

This step will narrow your scope more intensely on the customers who need exactly what you have to offer. These are the people who are looking for you or a clear alternative to your competitors. To quantify this group:

• Create a customer journey map. From awareness to purchase, this process can help you map out the ideal customer path. From how you expect customers to discover your products to the blockers that might keep them from clicking buy, this step is useful for market sizing and beyond. Use these customer journey templates if you're new to this process.
• Estimate conversion rates. Use historical data, industry benchmarks, or industry research to estimate conversion rates. This can help you quantify expected numbers of leads, prospects, and customers in each segment.
• Figure out buyer intent. Create a ranking or score for each segment to measure their likelihood of purchasing your product. This can help you prioritize segments with the highest conversion potential.
• Create a SOM estimate with your data. The research above will add credibility to your market size estimate. It can also help guide your growth strategies.

4. Multiply that customer number by estimated penetration rate.

To calculate penetration rate, divide the SOM you calculated above by your TAM, then multiply by 100.

Once you have a calculation for your market size, you'll want to make sure you can trust that number. Keep your market sizing current with these tips:

• Confirm your data is accurate and reliable. As you complete your research, use reliable sources such as industry reports, market studies, or government databases. Also, check to ensure the data you're referencing is up to date.
• Keep up with market growth, seasonality, industry trends, tech advancements, regulatory changes, and economic conditions. These factors can affect both market size and customer demand.
• Review and update your market size estimates regularly. Market conditions change over time. Plan regular reviews of your market size, then update your calculations with new or relevant data.

There are two simple methods for market sizing your business. These straightforward processes can help you use data to gauge market size.

Top Down Approach

The first is a top-down approach, in which you start by looking at the market as a whole, then refine it to get an accurate market size. That would look like starting from your total addressable market and filtering from there.

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How to Determine Market Size for a Business Plan

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If you do things right, your business plan is the first step in your journey toward becoming an entrepreneur, but the key is to ensure that every detail is correct. One of the most important aspects of your business plan is to determine the market size for the products or services that you intend to offer your target audience. Any legitimate investor will want to know that his investment has the potential for a sizeable return, and he will base his decision, in large part, on the size of the market that you’re trying to enter. Sizing up your market is also beneficial for developing new products and services.

Define Your Ideal Customer

You can’t begin to determine the market size without defining your ideal customer, who is also known as your targeted audience. The best way to figure this out is to know exactly what problem your product or service solves for the people most likely to be interested in making a purchase. For example, if you’re selling a gadget that can locate any remote control device in a person’s house, research may tell you that your ideal customer is a man in the 25- to 50-year old age range.

You arrived at this targeted consumer because your research told you that men dominate possession of television remote control devices, and are therefore more likely to misplace them, and then will be more likely to need your device. This process isn’t simply to determine not only who will buy your product or service, but also to help you eliminate people who will not be attracted to what you’re selling.

Define Your Piece of the Overall Market

The good news is that there isn't any company that's already established in your market that has a monopoly on that market. However, to have any chance of success, you must define the piece of that market that you are going to target. You can do this by taking the biggest player in the field and finding out how much of the market it has captured. For example, if you’re entering the TV device market, you may learn that customers spent $2 billion on these devices in 2017.

You also learn that Panasonic accounts for $1.5 billion of that market, so you know that the remaining $500 million is spread out among multiple smaller companies, and is the piece you'd would like to bite from.

Determine Your Percentage of that Piece of the Market

Just because you have now defined the size of your piece of the market doesn’t mean that you’re done because you still have to figure out your percentage of that piece. To do that, you have to know where you intend to sell your product or service, how many of that product or service you project to sell in a year, as well as the number of similar products and services that sold in the market the previous five years.

The projected number of sales will tell you what percentage of the market you can reasonably hope to capture, typically somewhere between 1 to 5 percent.

• GrowThink: How to Size an Emerging Market in Your Business Plan
• Entrepreneur: 5 Strategies to Effectively Determine Your Market Size
• Startups: How to Calculate the size of Your Target Plan
• Include potential market, target market and market share in your business plan. This will show readers how you arrived at your figures. You want to demonstrate a rational process that starts with a very large number and gradually reduces it to a smaller number you can expect to sell to. Showing the entire process will prove that your method was not arbitrary.

Sampson Quain is an experienced content writer with a wide range of expertise in small business, digital marketing, SEO marketing, SEM marketing, and social media outreach. He has written primarily for the EHow brand of Demand Studios as well as business strategy sites such as Digital Authority.

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How to estimate market size: Business and marketing planning for startups

Sizing the market is a necessary task for business and marketing planning, and budgeting for all startups, especially those that seek third-party financing such as venture capital (VC). Even though their investment philosophies may differ, most VCs and angel investors would like to know that they are investing in a market with a large potential size (typically, at least $1 billion).

Understanding your market potential

Even if you do not seek external financing, understanding your market potential is essential for a range of different strategic decisions, in areas such as:

• Product development
• Partnering and distribution
• Organizational design and critical employee skills

Starting point for estimating market size: Know the problem you are solving

The starting point for estimating market size is to understand the problem you solve for customers and the potential value your product generates for them. This is an aspect that many startup founders in the innovation community tend to overlook, since they get excited about the product they’ve developed without thinking about how it benefits their audience.

Depending on your technology, you may have to choose which customer problem to solve first. If this is the case, completing the exercise below may help you better grasp the market size for each application. This will make it easier to prioritize which problem to solve first.

Exercise: Estimating market size

This exercise consists of five steps to help you estimate the total market potential for a product. In each step, we build on a health innovation case study that assumes the problem we solve relates to patient safety in hospitals.

Step 1. Define your target customer

All early-stage entrepreneurs and startups must define their target customer .

Your target customer equals the person or company for whom your technology solves a specific problem. To define your target customer you must:

• Determine who your target customer is.
• Create a profile of your typical/expected target customer.

Given the importance of defining your target customer, it is crucial to set aside enough time to do a proper analysis of this first step.

Case study: We have analyzed patient-safety procedures in a few hospitals. We have determined that our innovative technology would generate the most value in the largest hospitals (the top 25%, ranked by size).

Step 2. Estimate the number of target customers

Estimate the total number of target customers in the market—companies who have a profile similar to that of your target customer.

If you’re a startup venture in Ontario or another Canadian province, you can use industry databases such as those offered by Statistics Canada, U.S. Bureau of Economic Analysis or Hoovers to help you quantify your market.

Case study: By studying publicly available sources, we have found out that in our target group there are 1,300 hospitals in Canada and the United States.

Step 3. Determine your penetration rate

Refine your market size by assuming a penetration rate for your category of product. The penetration rate is a function of the nature of your product. Assume a high penetration rate if your category of product is mission-critical or mandated through regulation; assume a low penetration rate for products with a specialized purpose.

Example: penetration rates of computers versus business intelligence systems:

• Computers, word-processing and internet: It is almost impossible today to operate a business in the developed world without a computer that has word-processing capabilities and is connected to the internet. While the penetration of those three technologies has not quite reached 100%, it is close enough to use that assumption for business growth and planning.
• Business intelligence systems: In theory, most companies would benefit from having a business intelligence system – a type of software that is used to manage and analyze data about finance, sales, and marketing activities, in addition to more specialized purposes. In practice, however, few ventures have the combination of the scale, skills and business practices required to make business intelligence systems a worthwhile investment.This limits the penetration rate to very large organizations that make up maybe less than 1% of all businesses in the developed world. Nevertheless, while 1% may not sound like a lot, it still represents a much larger number of target customers than a new startup could effectively pursue.

Case study: We have studied the factors that drive improvement in patient safety across North America, and found that it depends on provincial and state regulations. Based on areas where patient-safety regulations are strict, we can assume a penetration rate of 70% for our technology .

Step 4. Calculate the potential market size: Volume and value

Market volume.

To find the overall market potential (that is, the potential market volume), multiply your number of target customers by the penetration rate (see steps 2 and 3 above).

Case study : Using our fictitious example, where the number of target customers is 1,300 and the penetration rate is assumed to be 70%, the potential market volume would be calculated as follows:

1,300 hospitals × 70% = 910 hospitals

Market value

To calculate the monetary value of the market, multiply the market volume by your average value (that is, price expectations).

Case study: We assume each sale to a hospital will yield an average value of $2.5 million. To find the market value, we calculate the following:

910 hospitals × $ 2.5 million = $ 2.275 billion

5. Apply the market-size data

Following these steps to estimate your market size (value) is by no means an exact science. Still, there are ways to maximize the effectiveness of this exercise:

• At the time you make your first estimate, examine each assumption you make and what would cause it to change. To factor in the risks of change, calculate best-case and worst-case scenarios in addition to your expected scenario.
• Over time, monitor the accuracy of your initial assumptions and whether you need to modify them.

Case study: Our patient-safety technology may appeal to hospitals of a smaller size than initially assumed, especially if new regulations mandate tighter patient-safety procedures from all hospitals. While such a change would more than double the number of hospitals in our target market, smaller hospitals would not be able to pay as much, in turn driving the expected average price per sale down to $2 million.

Note: This exercise aims at estimating the total market potential for a product. It is important for startups to recognize that both early adopters and laggards are included in those numbers. While early adopters will likely be your customers in years 1 and 2, the laggards may not enter the market until year 20 or later. In terms of our case study, this would mean that the size of the market in year 1 would be about $100 million if early adopters comprise 5% of the overall hospital market for patient safety. For a more detailed understanding of how markets develop, read the article Technology adoption lifecycle .

The highlights

• Define your target customer
• Estimate the number of target customers
• Determine your penetration rate
• Calculate the potential market size: Volume and value
• Apply the market-size data
• The starting point? Understand the customer problem you solve and the potential value you generate.

Summary: These five steps outline how to estimate a market size—essential when making strategic decisions (e.g, business and marketing planning) and seeking third-party financing (e.g., venture capital).

Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.

Want to learn how to understand and talk to your customers? Join us for our next cohort of the Customer Development Immersive.

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More From Forbes

How to effectively determine your market size.

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One of the most crucial tasks an entrepreneur has is to calculate the size of their market, and the potential value that market has for their startup business. Without this data you can’t create a viable business plan, or be taken seriously when approaching potential investors.

As described in my book, The Art of Startup Fundraising , the market needs to be in the billions. Otherwise, even if you have the perfect team and product the returns will be limited for potential investors making your investment opportunity less attractive.

Market Size for Startups

Determining the market size is critical. It tells you and your partners, team and investors how much potential business is really out there. It helps calculate how much value there really is for your individual venture. This is critical to know, even if you never plan to raise a dime in outside capital.

Market size becomes far more important if you ever need to raise funding for your business. It is one of the most basic digits every potential angel and VC investor is going to expect. Even your friends and family should be asking about it during seed and pre-seed financing rounds. Coming up empty handed is going to destroy your credibility instantly.

Unfortunately, this is one factor which entrepreneurs frequently blow when formulating initial plans, stepping out into a new business and when pitching investors. So, how do you do it right?

How to Determine Market Size

To calculate your market size, you’ll either be looking for data on the number of potential customer, or number of transactions each year.

For example; if you are selling toothbrushes, virtually everyone can be counted in your big whole market figure. If people are listening to their dentists, and they are purchasing new toothbrushes 2-4 times per year, that number is even larger. If you are selling houses, then there may only be an average of 5.34M transactions in a good year, in the entire United States.

The Art of Startup Fundraising book

Keep in mind:  

• Show projections going out 3 years (it’s hard to accurately analyze after that)
• Account for organic growth or decline in the years ahead
• Your roll out to geographic areas over time

There are a variety of ways to acquire this data. Census and labor bureau hold a lot of information, and most industries have formal associations which compile and track this type of data. You can also commission your own research or purchase studies.

Once you have the data you want to make sure that you are presenting it in a powerful way in your pitch deck since it is one of the most important slides. A good pitch deck template is the one created by Silicon Valley legend, Peter Thiel ( see it here ) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Thiel actually includes not one, but two slides around the market and its size. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M ( see it here ).

Below is another example of how to show in your pitch deck your market growing over time.

How to Determine Market Value

Market size, or the number of potential customers or unit sales is one thing. How much that is worth, is a completely different, and perhaps more important figure.

You need to know how much revenue that market has to offer. For example; UpNest is one of the fastest growing real estate tech startups, which helps home buyers and sellers save on Realtor commissions. If the average home price is $394,300, and there are 5M sales per year, and the average Realtor commission is 5% of the sales price, and 90% of users use a Realtor, UpNest is in an $88.7B per year industry. Or has a market size of $88.7B.

Determining Total Addressable Market (TAM)

Realistically, no startup should or can expect to gain 100% market share. Trying to capture an entire market, without first targeting several niches, price points, customer sizes or geo areas for roll out, is going to be financial suicide for the vast majority of entrepreneurs.

For example; even giant online real estate firm Zillow, which dominates the marketplace, has far more modest estimates for its own new venture in buying and flipping houses directly with consumers. The company’s CEO recently said that if it could acquire 275,000 units a $3,500 profit each, it would be doing very well. That’s about $1B a year from just one extra revenue stream, at just over 18% of the available market share.

Of course, most new startups can’t expect to even command that much market share. Even if you could, most seasoned investors won’t believe it until you prove it. Tx Zhuo of Karlin Ventures says “If it’s 1 to 5 percent of the pie, you have a realistic plan.”

If you have no idea what’s a reasonable amount of market share in your industry, Projection Hub says one hack is to anonymously call around to all of your local competitors and find out how much volume they are doing. Then estimate you’ll be doing a fraction of that as you gain traction.

Also factor in the static versus evolving marketplace. Do population growth rates mean there will be more prospective customers in your market in 5 years, or less? Don’t forget to factor in your own impact on the market.

For example; if you were Amazon a decade ago, you should have factored in the fact that you are about to destroy the marketplace for regular bookstores. Their price cutting also slashed the value of the market in a huge way.

Early stage startup investor at Matrix Partners, Jared Sleeper notes there are actually :three distinct ways to calculate TAM.”

• Top-down, using industry research and reports.
• Bottom-up, using data from early selling efforts.
• Value theory, using conjecture about buyer willingness to pay.

It’s best to know them all before you go into an investor meeting, or finish polishing your pitch deck.

Knowing your market size is a basic foundational part of launching any startup venture. Every entrepreneur needs to know how to calculate it, and how it relates to potential revenue in their addressable market.

Be realistic. Investors like big numbers, but don’t have patience for flakes over-inflating numbers. You should be able to show the potential to achieve VC sized growth and returns over time. Just make sure you can back up your claims with the data and research, you derived your numbers from, and how you arrived at your assumptions.

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How to Write the Market Analysis Section of a Business Plan

Written by Dave Lavinsky

What is the Market Analysis in a Business Plan?

The market analysis section of your business plan is where you discuss the size of the market in which you’re competing and market trends that might affect your future potential such as economic, political, social and/or technological shifts.

This helps you and readers understand if your market is big enough to support your business’ growth, and whether future conditions will help or hurt your business. For example, stating that your market size is $56 billion, has been growing by 10% for the last 10 years, and that trends are expected to further increase the market size bodes well for your company’s success.

Download our Ultimate Business Plan Template here

What Should a Market Analysis Include?

You’ll want to address these issues in your market analysis:

• Size of Industry – How big is the overall industry?
• Projected Growth Rate of Industry – Is the industry growing or shrinking? How fast?
• Target Market – Who are you targeting with this product or service?
• Competition – How many businesses are currently in the same industry?

Learn how to write the full market analysis below.

How to Write a Market Analysis

Here’s how to write the market analysis section of a business plan.

• Describe each industry that you are competing in or will be targeting.
• Identify direct competition, but don’t forget about indirect competition – this may include companies selling different products to the same potential customer segments.
• Highlight strengths and weaknesses for both direct and indirect competitors, along with how your company stacks up against them based on what makes your company uniquely positioned to succeed.
• Include specific data, statistics, graphs, or charts if possible to make the market analysis more convincing to investors or lenders.

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Industry overview.

In your industry overview, you will define the market in which you are competing (e.g., restaurant, medical devices, etc.).

You will then detail the sub-segment or niche of that market if applicable (e.g., within restaurants there are fast food restaurants, fine dining, etc.).

Next, you will describe the key characteristics of your industry. For example, discuss how big the market is in terms of units and revenues. Let the reader know if the market is growing or declining (and at what rate), and what key industry trends are facing your market.

Use third-party market research as much as possible to validate the discussion of your industry.

Here is a list of additional items you may analyze for a complete industry overview:

• An overview of the current state of the industry . How big is it, how much does it produce or sell? What are its key differentiators from competitors? What is its target customer base like – demographic information and psychographics? How has the industry performed over time (global, domestic)?
• Analyze the macro-economic factors impacting your industry . This includes items such as economic growth opportunities, inflation, exchange rates, interest rates, labor market trends, and technological improvements. You want to make sure that all of these are trending in a positive direction for you while also being realistic about them. For example, if the economy is in shambles you might want to wait before entering the particular market.
• Analyze the political factors impacting your industry . This is an often-overlooked section of any business plan, but it can be important depending on what type of company you are starting. If you’re in a highly regulated industry (such as medical devices), this is something that you’ll want to include.
• Analyze the social factors impacting your industry . This includes analyzing society’s interest in your product or service, historical trends in buying patterns in your industry, and any effects on the industry due to changes in culture. For example, if there is a growing counter-culture trend against big oil companies you might want to position yourself differently than a company in this industry.
• Analyze the technological factors impacting your industry . This includes analyzing new technologies being developed in software, hardware, or applications that can be used to improve your product or service. It also includes emerging consumer trends and will be highly dependent on your business type. In a technology-related venture, you would analyze how these changes are impacting consumers. For an educational-related venture, you would analyze how these changes are impacting students, teachers, and/or administrators.

For each of these items, you want to provide some detail about them including their current state as well as what external factors have played a role in the recent past. You can also include many other important factors if they apply to your business including demographic trends, legal issues, environmental concerns, and sustainability issues.

When you are done analyzing all of these factors, wrap it up by summing them up in a statement that includes your view on the future of the industry. This should be positive to attract investors, potential customers, and partners.

If you’re having trouble thinking about all of these factors then it might be helpful to first develop a SWOT analysis for your business.

Once you have an understanding of the market, you’ll need to think about how you will position yourself within that potential market.

Picking Your Niche

You want to think about how large your market is for this venture. You also want to consider whether you’d like to pick a niche within the overall industry or launch yourself into the mainstream.

If you have an innovative product it can be easier to enter the mainstream market – but at the same time, you might face some additional competition if there are similar products available.

You can choose to specialize in a niche market where you’ll face less competition – but might be able to sell your services at a higher price point (this could make it easier for you to get potential customers).

Of course, if your product or service is unique then there should be no competition. But, what happens if it isn’t unique? Will you be able to differentiate yourself enough to create a competitive advantage or edge?

If you are planning on entering the mainstream market, think about whether there are different sub-niches within your specific market. For example, within the technology industry, you can choose to specialize in laptops or smartphones or tablets, or other categories. While it will be more difficult to be unique in a mainstream market, you will still be able to focus on one type or category of products.

How Will You Stand Out?

Many companies are able to stand out – whether by offering a product that is unique or by marketing their products in a way that consumers notice. For example, Steve Jobs was able to take a business idea like the iPhone and make it into something that people talked about (while competitors struggled to play catch up).

You want your venture to stand out – whether with an innovative product or service or through marketing strategies. This might include a unique brand, name, or logo. It might also include packaging that stands out from competitors.

Write down how you will achieve this goal of standing out in the marketplace. If it’s a product, then what features do you have that other products don’t? If it’s a service, then what is it about this service that will make people want to use your company rather than your competition?

You also need to think about marketing. How are you going to promote yourself or sell your product or service? You’ll need a marketing plan for this – which might include writing copy, creating an advertisement, setting up a website, and several other activities. This should include a description of each of these strategies.

If you’re struggling with the details of any of these sections, it might be helpful to research what other companies in your market are doing and how they’ve been successful. You can use this business information to inform your own strategies and plans.

Relevant Market Size & Competition

In the second stage of your analysis, you must determine the size and competition in your specific market.

Target Market Section

Your company’s relevant market size is the amount of money it could make each year if it owned a complete market share.

It’s simple.

To begin, estimate how many consumers you expect to be interested in purchasing your products or services each year.

To generate a more precise estimate, enter the monetary amount these potential customers may be ready to spend on your goods or services each year.

The size of your market is the product of these two figures. Calculate this market value here so that your readers can see how big your market opportunity is (particularly if you are seeking debt or equity funding).

You’ll also want to include an analysis of your market conditions. Is this a growing or declining market? How fast is it growing (or declining)? What are the general trends in the market? How has your market shifted over time?

Include all of this information in your own business plan to give your readers a clear understanding of the market landscape you’re competing in.

The Competition

Next, you’ll need to create a comprehensive list of the competitors in your market. This competitive analysis includes:

• Direct Competitors – Companies that offer a similar product or service
• Indirect Competitors – Companies that sell products or services that are complementary to yours but not directly related

To show how large each competitor is, you can use metrics such as revenue, employees, number of locations, etc. If you have limited information about the company on hand then you may want to do some additional research or contact them directly for more information. You should also include their website so readers can learn more if they desire (along with social media profiles).

Once you complete this list, take a step back and try to determine how much market share each competitor has. You can use different methods to do this such as market research, surveys, or conduct focus groups or interviews with target customers.

You should also take into account the barriers to entry that exist in your market. What would it take for a new company to enter the market and start competing with you? This could be anything from capital requirements to licensing and permits.

When you have all of this information, you’ll want to create a table like the one below:

Once you have this data, you can start developing strategies to compete with the other companies which will be used again later to help you develop your marketing strategy and plan. 

Writing a Market Analysis Tips

• Include an explanation of how you determined the size of the market and how much share competitors have.
• Include tables like the one above that show competitor size, barriers to entry, etc.
• Decide where you’re going to place this section in your business plan – before or after your SWOT analysis. You can use other sections as well such as your company summary or product/service description. Make sure you consider which information should come first for the reader to make the most sense.
• Brainstorm how you’re going to stand out in this competitive market.

Formatting the Market Analysis Section of Your Business Plan

Now that you understand the different components of the market analysis, let’s take a look at how you should structure this section in your business plan.

Your market analysis should be divided into two sections: the industry overview and market size & competition.

Each section should include detailed information about the topic and supporting evidence to back up your claims.

You’ll also want to make sure that all of your data is up-to-date. Be sure to include the date of the analysis in your business plan so readers know when it was conducted and if there have been any major changes since then.

In addition, you should also provide a short summary of what this section covers at the beginning of each paragraph or page. You can do this by using a title such as “Industry Overview” or another descriptive phrase that is easy to follow.

As with all sections in a business plan, make sure your market analysis is concise and includes only the most relevant information to keep your audience engaged until they reach your conclusion.

A strong market analysis can give your company a competitive edge over other businesses in its industry, which is why it’s essential to include this section in your business plan. By providing detailed information about the market you’re competing in, you can show your readers that you understand the industry and know how to capitalize on current and future trends.

Business Plan Market Analysis Examples

The following are examples of how to write the market analysis section of a business plan:

Business Plan Market Analysis Example #1 – Hosmer Sunglasses, a sunglasses manufacturer based in California

According to the Sunglass Association of America, the retail sales volume of Plano (non-prescription) sunglasses, clip-on sunglasses, and children’s sunglasses (hereinafter collectively referred to as “Sunwear”) totaled $2.9 billion last year. Premium-priced sunglasses are driving the Plano Sunwear market. Plano sunglasses priced at $100 or more accounted for more than 49% of all Sunwear sales among independent retail locations last year. 

The Sunglass Association of America has projected that the dollar volume for retail sales of Plano Sunwear will grow 1.7% next year. Plano sunglass vendors are also bullish about sales in this year and beyond as a result of the growth of technology, particularly the growth of laser surgery and e-commerce.

Business Plan Market Analysis Example #2 – Nailed It!, a family-owned restaurant in Omaha, NE

According to the Nebraska Restaurant Association, last year total restaurant sales in Nebraska grew by 4.3%, reaching a record high of $2.8 billion. Sales at full-service restaurants were particularly strong, growing 7% over 2012 figures. This steady increase is being driven by population growth throughout the state. The Average Annual Growth Rate (AGR) since 2009 is 2.89%.

This fast growth has also encouraged the opening of new restaurants, with 3,035 operating statewide as of this year. The restaurant industry employs more than 41,000 workers in Nebraska and contributes nearly $3 billion to the state economy every year.

Nebraska’s population continues to increase – reaching 1.9 million in 2012, a 1.5% growth rate. In addition to population, the state has experienced record low unemployment every year since 2009 – with an average of 4.7% in 2013 and 2014.

Business Plan Market Analysis Example #3 – American Insurance Company (AIC), a chain of insurance agencies in Maine

American Insurance Company (AIC) offers high-quality insurance at low prices through its chain of retail outlets in the state of Maine. Since its inception, AIC has created an extensive network of agents and brokers across the country with expanding online, call center and retail business operations.

AIC is entering a market that will more than double in size over the next 50 years according to some industry forecasts. The insurance industry is enjoying low inflation rates, steady income growth, and improving standards of living for most Americans during what has been a difficult period for much of American business. This makes this a good time to enter the insurance industry as it enjoys higher margins because customers are purchasing more coverage due to increased costs from medical care and higher liability claims.

American Insurance Company provides affordable homeowners, auto, and business insurance through high-quality fulfillment centers across America that have earned a reputation for top-notch customer service.

AIC will face significant competition from both direct and indirect competitors. The indirect competition will come from a variety of businesses, including banks, other insurance companies, and online retailers. The direct competition will come from other well-funded start-ups as well as incumbents in the industry. AIC’s competitive advantages include its low prices, high quality, and excellent customer service.

AIC plans to grow at a rate that is above average for the industry as a whole. The company has identified a market that is expected to grow by more than 100% in the next decade. This growth is due to several factors: the increase in the number of two-income households, the aging population, and the impending retirement of many baby boomers will lead to an increase in the number of people who are purchasing insurance.

AIC projects revenues of $20M in year one, which is equivalent to 100% growth over the previous year. AIC forecasts revenue growth of 40%-60% each year on average for 10 years. After that, revenue growth is expected to slow down significantly due to market saturation.

The following table illustrates these projections:

Competitive Landscape

Direct Competition: P&C Insurance Market Leaders

Indirect Competition: Banks, Other Insurance Companies, Retailers

Market Analysis Conclusion

When writing the market analysis section, it is important to provide specific data and forecasts about the industry that your company operates in. This information can help make your business plan more convincing to potential investors.

If it’s helpful, you should also discuss how your company stacks up against its competitors based on what makes it unique. In addition, you can identify any strengths or weaknesses that your company has compared to its competitors.

Based on this data, provide projections for how much revenue your company expects to generate over the next few years. Providing this information early on in the business plan will help convince investors that you know what you are talking about and your company is well-positioned to succeed.  

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Other Resources for Writing Your Business Plan

How to Write a Great Business Plan Executive Summary How to Expertly Write the Company Description in Your Business Plan The Customer Analysis Section of Your Business Plan Completing the Competitive Analysis Section of Your Business Plan The Management Team Section of Your Business Plan Financial Assumptions and Your Business Plan How to Create Financial Projections for Your Business Plan Everything You Need to Know about the Business Plan Appendix Best Business Plan Software Business Plan Conclusion: Summary & Recap  

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Market Sizing

Estimating product potential.

By the Mind Tools Content Team

Imagine that you've just spent three years building a fantastic business – your product is great, your website is cutting edge, your people are well-trained and enthusiastic, and your customers love what you do.

The problem is, you're running at a loss – there simply aren't enough customers in the market to support the business.

This is a heartbreaking, and very common, position to be in. It's why many professional entrepreneurs and investors conduct "market sizing" exercises before they invest in a new business.

In this article, we'll look at how you can analyze your market size, and how you can use this data to make informed strategic decisions.

What Is Market Sizing?

The "market size" is made up of the total number of potential buyers of a product or service within a given market, and the total revenue that these sales may generate.

It's important to calculate and understand market size for several reasons.

First, entrepreneurs and organizations can use market sizing to estimate how much profit they could potentially earn from a new business, product or service. This helps decision-makers to decide whether they should invest in it.

If you choose to move forward, this analysis will also help you to develop a marketing strategy that addresses the unique needs and potential of your core market.

Market sizing can also help you to estimate the number of people that you may need to hire before you launch a new product or service, rather than "feeling your way" as you test your new market. If you know this from the start, you can optimize your approach to recruitment, so that you have the right people in place when you need them.

Market Sizing Methods

There are two methods that are commonly used for market sizing:

1. Top Down Market Sizing – although the top-down method is simple, it's often unreliable and overly optimistic. It looks at the "relevant" market size for your product or service, and then calculates how much your organization might earn from it.

For example, imagine that your organization markets learning resources to schools. Your research shows that there are 6,000 relevant schools in your country. You know that the average sale per school is around $50,000, which means that your market size is $300 million.

Of course, this is an incredibly optimistic and unrealistic figure. Not every school needs your products, and they're unlikely to purchase $50,000 worth of goods each, so it could be a real challenge to capture even a small percentage of this market. A top-down approach gives you inflated data, and you often can't rely on it to make good decisions.

2. Bottom-Up – This approach is often more time-consuming than top-down market sizing, because you do all of your own market research and you don't rely solely on generalized forecasts and trends. However, you'll get a more realistic and accurate assessment of your market's potential.

In this article, we'll focus on how you can use a bottom-up approach to determing your market size.

How to Calculate Market Size

Follow these three steps to identify your market size:

1. Define Your Target Market

To predict the size of your market, you need to know the type of person that your product or service is best suited to. Your offering has to fulfilll a need – or solve a problem – uniquely well for a group of people, and you need to define who these people are.

Also, think about how you can access these customers – there's no point considering them if you can't reach them cost-effectively.

You can use market segmentation to divide your market into specific groups. This will give you a greater understanding of each group that your product or service will appeal to, and will enable you to tailor your offering to the specific needs of each group.

Once you've identified the different possible segments in your market, choose the ones that you want to focus on to build your business.

Now you need to determine how large the market is for each segment you've identified. To do this, contact business organizations, data providers, civic organizations, city and state development offices, or regulatory agencies that handle business and commerce; and do what you can to source a list of potential clients in your chosen segments.

Your organization wants to develop point-of-sale software for mid-sized grocery stores. But, before you invest the time and money to develop the software, you need to make sure that the market is large enough, and that people are interested enough in your product to buy it.

After researching online and contacting your region's business and commerce department, you determine that there are roughly 10,000 mid-sized grocery stores in your country, and you source a list of these stores.

2. Use Market Research to Assess Interest in Your Product

Obviously, not everyone in your target market will want to buy your product. So your next step is to estimate realistic interest.

One way to do this is to focus on competitors who target the same group of buyers. What is their market share? And what are their annual sales for similar products or services?

If your competitors are exclusively focused on this market, this can give you a good estimate of potential market size. However, it can be almost impossible to source this information if they focus on other markets as well, or if they are part of larger business groups.

Another way to assess interest is through individual interviews, focus groups , and surveys. Question a sufficiently large sample of people or businesses that fall within your target market, and explain what you have to offer. The larger your sample, the better your analysis will be.

Ask them questions like:

• Does this product interest you?
• What would they feel comfortable paying for it?
• How likely would you be to purchase this product or a similar product within the next two years?

It's important to draw conservative conclusions based on the feedback you get from these focus groups or surveys. Often, people will say one thing and do another. People often "think twice" before actually making a purchase, and this is especially true as budgets, interests, and market conditions change.

Over the course of three months, you talk to 100 randomly selected mid-sized grocery stores, which represent one percent of your target market. You explain the idea behind the new software, and the benefits it will provide to the store owners.

After the presentations are finished, 35 stores express a strong interest in the software, and a willingness to buy once it's available. To be conservative, you reduce this number to 18. So, 18 percent of stores in your market will be interested in this product. Out of 10,000 possible grocery stores, this means that 1,800 could buy.

It will obviously take a lot of time to set up and conduct this type of research. Think carefully about any other market research information you might need, and, where appropriate, gather this at the same time.

Step 3: Calculate Potential Sales

You now have a more realistic figure that represents how popular your product or service could be to your target market. Use this data to decide whether your product is worth the investment and risk.

To do this, develop a financial model of your business using the data you have gathered (see our articles on Cash Flow Forecasting and use of NPVs and IRRs for more on this.)

Then, identify key assumptions within your model, and test these using a technique such as Scenario Analysis .

You've determined that 1,800 grocery stores might invest in your software, which costs $30,000. If 100 percent of these stores purchase the software, this would result in a return of $54 million.

Your organization has already estimated that it will have to invest at least $7 million to develop, test, and market the new software. This investment is only 13 percent of potential annual revenues, so the risk is low, even if the response isn't as positive as predicted. Your organization therefore decides to move forward with the development of new software.

Your "market size" is the total number of likely buyers of your product or service within a given market. This information can be particularly useful to businesses and entreprenuers looking to invest in new products. It can also support strategic decision making and enable you to create an evidence-led marketing strategy.

There are two methods you can use to determine your market size:

• Top Down – this looks at the "relevant" market size for your product or service, and then calculates how much your organization might earn from it.
• Bottom Up – you complete your own market research to get a more realistic and accurate market size for your product or service.

To calculate market size using the bottom-up approach, follow these three steps:

• Define your target market.
• Use market research to assess interest in your product.
• Calculate potential sales.

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How to Define Your Target Market

4 min. read

Updated April 4, 2024

One of the most powerful tools of small business marketing strategy is defining and addressing your target market—the audience that you think is most likely to buy your product or service. The key to identifying this customer base is market segmentation, or figuring out the demographics of your specific market.

Common sense makes it seem obvious from afar. You can’t (and shouldn’t) try to sell your product to everyone in the world. You’d waste a lot of money and resources very quickly.

But how do you figure out who your target audience is? Who or what should it be? How would you know? Here are five tips to help you figure it out.

1. Don’t try to please everybody

Strategy is focus. Say you’re planning to start a restaurant ; which of these three options is easier?

• Pleasing customers 40 to 75 years old, wealthy, much more concerned with healthy eating than cheap eating, appreciating seafood and poultry, liking a quiet atmosphere.
• Pleasing customers 15 to 30 years old, with limited budgets, who like a loud place with low prices and fast food.
• Pleasing everybody.

I really hope you chose one of the first two, and not the third. This is the essence of target marketing—divide and conquer. Different groups of people have different pain points and different desires. Most of the time, efforts to please everyone end up pleasing no one.

• 2. Learn market segmentation

It’s about segments, like pie segments or orange segments—except that in this case, it’s segments of a total market, or TAM .

In my “divide and conquer” example above in the first point, the specific age ranges, wealth, and atmosphere preferences describe particular market segments.

In the illustration here below, U.S. census data divides the population into demographic segments. Demographics are the old standards like age, gender, and so on.

You’ve seen market segmentations referred to frequently in business articles, interviews, and discussions. People will appeal to certain age groups, genders, income levels, and so forth. Divide and conquer is a simple concept; market segmentation is how you make it practical for your business.

Let’s say you think your target market is age 40 to 75 years old, wealthy, and interested in healthy eating. How do you validate your assumption that that demographic will be your ideal target customers? That’s where market research comes in. Talking to customers and potential customers is one of the best ways to do this kind of research, but there are many approaches.

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• 3. Use segmentation creatively

Don’t limit your target market strategy for market segmentation by age, gender, and economic level.

For example, when I was consulting for Apple Computer, we divided the market into user groups:

• Small business
• Large business

I also liked a shopping center segmentation that divided its market into so-called psychographic market segmentation:

• Kids and cul-de-sacs were affluent upscale suburban families, “a noisy medley of bikes, dogs, carpools, rock music, and sports.”
• Winner’s circle were wealthy suburban executives, “well-educated, mobile executives and professionals with teen-aged families. Big producers, prolific spenders, and global travelers.”
• Gen X and babies were upper-middle income, young, white-collar suburbanites.
• Country squires were wealthy elite ex-urbanites, “where the wealthy have escaped urban stress to live in rustic luxury. Affluence, big bucks in the boondocks.”

I knew a business that segmented its business customers into decision-process types as well:

• Decision by committee
• Decision by functional manager
• Decision by owner

And I call this final example, for lack of a formal definition, strategic intersection.

In the diagram here, the social media services that Have Presence offers are targeted to small business owners who:

• Want outside help with their social media; and
• Value business social media; and
• Have a budget to pay for the service.

Any of these creative segmentations can help you set a target market, and can also be a jumping off point for putting together a user or buyer persona —another useful tool for understanding your target audience and developing better marketing messaging.

• 4. Consider your own unique identity too

Your business probably reflects who you are and what you like to do, as well as what you do best. Marketing to people you like as the target market is an advantage. If you like the feel of small business better than the big corporate giants, then you’re probably better off setting the small business as a target market.

As Palo Alto Software, the host of Bplans, grew up and grew our business plan software, its founder (that would be me) was more comfortable with the do-it-yourself entrepreneur and business owner than the high-end consultants, so we ended up targeting the do-it-yourselfers in business.

So, somebody who loves fine food, tastefully prepared and served, is probably more comfortable with an upscale target market than with price-sensitive young families.

• 5. Define your target market early and revise as needed

Do it well as soon as you can, and keep reviewing and refreshing as you go along. You shouldn’t think of your target market as set in stone. As you learn more about your customers, how you define your target market will probably change.

The right target market increases your chances of success because you can communicate better with a well-defined group, and that holds expenses down and makes results better.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

• 1. Don’t try to please everybody

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A lot of preparation goes into starting a business before you can open your doors to the public or launch your online store. One of your first steps should be to write a business plan . A business plan will serve as your roadmap when building your business.

Within your business plan, there’s an important section you should pay careful attention to: your market analysis. Your market analysis helps you understand your target market and how you can thrive within it.

Simply put, your market analysis shows that you’ve done your research. It also contributes to your marketing strategy by defining your target customer and researching their buying habits. Overall, a market analysis will yield invaluable data if you have limited knowledge about your market, the market has fierce competition, and if you require a business loan. In this guide, we'll explore how to conduct your own market analysis.

How to conduct a market analysis: A step-by-step guide

In your market analysis, you can expect to cover the following:

Industry outlook

Target market

Market value

Competition

Barriers to entry

Let’s dive into an in-depth look into each section:

Step 1: Define your objective

Before you begin your market analysis, it’s important to define your objective for writing a market analysis. Are you writing it for internal purposes or for external purposes?

If you were doing a market analysis for internal purposes, you might be brainstorming new products to launch or adjusting your marketing tactics. An example of an external purpose might be that you need a market analysis to get approved for a business loan .

The comprehensiveness of your market analysis will depend on your objective. If you’re preparing for a new product launch, you might focus more heavily on researching the competition. A market analysis for a loan approval would require heavy data and research into market size and growth, share potential, and pricing.

Step 2: Provide an industry outlook

An industry outlook is a general direction of where your industry is heading. Lenders want to know whether you’re targeting a growing industry or declining industry. For example, if you’re looking to sell VCRs in 2020, it’s unlikely that your business will succeed.

Starting your market analysis with an industry outlook offers a preliminary view of the market and what to expect in your market analysis. When writing this section, you'll want to include:

Market size

Are you chasing big markets or are you targeting very niche markets? If you’re targeting a niche market, are there enough customers to support your business and buy your product?

Product life cycle

If you develop a product, what will its life cycle look like? Lenders want an overview of how your product will come into fruition after it’s developed and launched. In this section, you can discuss your product’s:

Research and development

Projected growth

How do you see your company performing over time? Calculating your year-over-year growth will help you and lenders see how your business has grown thus far. Calculating your projected growth shows how your business will fare in future projected market conditions.

Step 3: Determine your target market

This section of your market analysis is dedicated to your potential customer. Who is your ideal target customer? How can you cater your product to serve them specifically?

Don’t make the mistake of wanting to sell your product to everybody. Your target customer should be specific. For example, if you’re selling mittens, you wouldn’t want to market to warmer climates like Hawaii. You should target customers who live in colder regions. The more nuanced your target market is, the more information you’ll have to inform your business and marketing strategy.

With that in mind, your target market section should include the following points:

Demographics

This is where you leave nothing to mystery about your ideal customer. You want to know every aspect of your customer so you can best serve them. Dedicate time to researching the following demographics:

Income level

Create a customer persona

Creating a customer persona can help you better understand your customer. It can be easier to market to a person than data on paper. You can give this persona a name, background, and job. Mold this persona into your target customer.

What are your customer’s pain points? How do these pain points influence how they buy products? What matters most to them? Why do they choose one brand over another?

Research and supporting material

Information without data are just claims. To add credibility to your market analysis, you need to include data. Some methods for collecting data include:

Target group surveys

Focus groups

Reading reviews

Feedback surveys

You can also consult resources online. For example, the U.S. Census Bureau can help you find demographics in calculating your market share. The U.S. Department of Commerce and the U.S. Small Business Administration also offer general data that can help you research your target industry.

Step 4: Calculate market value

You can use either top-down analysis or bottom-up analysis to calculate an estimate of your market value.

A top-down analysis tends to be the easier option of the two. It requires for you to calculate the entire market and then estimate how much of a share you expect your business to get. For example, let’s assume your target market consists of 100,000 people. If you’re optimistic and manage to get 1% of that market, you can expect to make 1,000 sales.

A bottom-up analysis is more data-driven and requires more research. You calculate the individual factors of your business and then estimate how high you can scale them to arrive at a projected market share. Some factors to consider when doing a bottom-up analysis include:

Where products are sold

Who your competition is

The price per unit

How many consumers you expect to reach

The average amount a customer would buy over time

While a bottom-up analysis requires more data than a top-down analysis, you can usually arrive at a more accurate calculation.

Step 5: Get to know your competition

Before you start a business, you need to research the level of competition within your market. Are there certain companies getting the lion’s share of the market? How can you position yourself to stand out from the competition?

There are two types of competitors that you should be aware of: direct competitors and indirect competitors.

Direct competitors are other businesses who sell the same product as you. If you and the company across town both sell apples, you are direct competitors.

An indirect competitor sells a different but similar product to yours. If that company across town sells oranges instead, they are an indirect competitor. Apples and oranges are different but they still target a similar market: people who eat fruits.

Also, here are some questions you want to answer when writing this section of your market analysis:

What are your competitor’s strengths?

What are your competitor’s weaknesses?

How can you cover your competitor’s weaknesses in your own business?

How can you solve the same problems better or differently than your competitors?

How can you leverage technology to better serve your customers?

How big of a threat are your competitors if you open your business?

Step 6: Identify your barriers

Writing a market analysis can help you identify some glaring barriers to starting your business. Researching these barriers will help you avoid any costly legal or business mistakes down the line. Some entry barriers to address in your marketing analysis include:

Technology: How rapid is technology advancing and can it render your product obsolete within the next five years?

Branding: You need to establish your brand identity to stand out in a saturated market.

Cost of entry: Startup costs, like renting a space and hiring employees, are expensive. Also, specialty equipment often comes with hefty price tags. (Consider researching equipment financing to help finance these purchases.)

Location: You need to secure a prime location if you’re opening a physical store.

Competition: A market with fierce competition can be a steep uphill battle (like attempting to go toe-to-toe with Apple or Amazon).

Step 7: Know the regulations

When starting a business, it’s your responsibility to research governmental and state business regulations within your market. Some regulations to keep in mind include (but aren’t limited to):

Employment and labor laws

Advertising

Environmental regulations

If you’re a newer entrepreneur and this is your first business, this part can be daunting so you might want to consult with a business attorney. A legal professional will help you identify the legal requirements specific to your business. You can also check online legal help sites like LegalZoom or Rocket Lawyer.

Tips when writing your market analysis

We wouldn’t be surprised if you feel overwhelmed by the sheer volume of information needed in a market analysis. Keep in mind, though, this research is key to launching a successful business. You don’t want to cut corners, but here are a few tips to help you out when writing your market analysis:

Use visual aids

Nobody likes 30 pages of nothing but text. Using visual aids can break up those text blocks, making your market analysis more visually appealing. When discussing statistics and metrics, charts and graphs will help you better communicate your data.

Include a summary

If you’ve ever read an article from an academic journal, you’ll notice that writers include an abstract that offers the reader a preview.

Use this same tactic when writing your market analysis. It will prime the reader of your market highlights before they dive into the hard data.

Get to the point

It’s better to keep your market analysis concise than to stuff it with fluff and repetition. You’ll want to present your data, analyze it, and then tie it back into how your business can thrive within your target market.

Revisit your market analysis regularly

Markets are always changing and it's important that your business changes with your target market. Revisiting your market analysis ensures that your business operations align with changing market conditions. The best businesses are the ones that can adapt.

Why should you write a market analysis?

Your market analysis helps you look at factors within your market to determine if it’s a good fit for your business model. A market analysis will help you:

1. Learn how to analyze the market need

Markets are always shifting and it’s a good idea to identify current and projected market conditions. These trends will help you understand the size of your market and whether there are paying customers waiting for you. Doing a market analysis helps you confirm that your target market is a lucrative market.

2. Learn about your customers

The best way to serve your customer is to understand them. A market analysis will examine your customer’s buying habits, pain points, and desires. This information will aid you in developing a business that addresses those points.

3. Get approved for a business loan

Starting a business, especially if it’s your first one, requires startup funding. A good first step is to apply for a business loan with your bank or other financial institution.

A thorough market analysis shows that you’re professional, prepared, and worth the investment from lenders. This preparation inspires confidence within the lender that you can build a business and repay the loan.

4. Beat the competition

Your research will offer valuable insight and certain advantages that the competition might not have. For example, thoroughly understanding your customer’s pain points and desires will help you develop a superior product or service than your competitors. If your business is already up and running, an updated market analysis can upgrade your marketing strategy or help you launch a new product.

Final thoughts

There is a saying that the first step to cutting down a tree is to sharpen an axe. In other words, preparation is the key to success. In business, preparation increases the chances that your business will succeed, even in a competitive market.

The market analysis section of your business plan separates the entrepreneurs who have done their homework from those who haven’t. Now that you’ve learned how to write a market analysis, it’s time for you to sharpen your axe and grow a successful business. And keep in mind, if you need help crafting your business plan, you can always turn to business plan software or a free template to help you stay organized.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

On a similar note...

Market Size for a Business Plan – 2 Methods to Gauge It

In order to estimate how much in sales your startup can hope for, you’re going to have to estimate the market size for your product/service(s). This is critical for your startup because it will give you an idea of your business’ potential. It will also help you plan for capacity-related issues.

2 approaches to estimating the market size for a business plan

I cover this topic more in-depth in a post on market size and growth rate on my sister site, InvestSomeMoney.com.

The context there is focused on investing your money in a publicly-traded company. Though that’s a little different than what we are doing here, the fundamental principles remain the same.

The goal is to determine how many potential customers there are for a business and how much they are willing to spend. In order to do that, we can employ two general methods. These methods are a top-down analysis and a bottom-up approach to understand market size and growth.

One way to think about this is that a bottom-up approach uses multiplication and a top-down analysis uses division to arrive at an estimated market size.

After writing on this subject several times, I’ve come up with another way to think about these methods. I think a bottom-up approach should look internally, at things like unit size and capacity. A top-down analysis should look externally at things like demographics and market research.

Looking at this from these two different perspectives opens the door for further analysis. When you’re done, you should know whether you can expect to be capacity constrained or demand constrained. You’ll also start to flesh out some ideas that will help you further into your business plan.

If you do an analysis with both approaches, you can compare the results. For instance, if your bottom-up approach is higher, you’ll know that you could have excess capacity issues. You need to consider scaling that back or otherwise expanding your product/service offering to drum up additional demand.

Conversely, if your top-down analysis reveals that demand is in excess of capacity, then you are leaving money on the table. Time to start thinking about what you can do to scale up and capture as much of the market as possible.

Let’s start by taking a look at a bottom-up approach to estimating the market size for a business plan.

Bottom-up approach example

On my sister site, InvestSomeMoney.com, I researched three real-life examples of a bottom up market sizing approach . In those examples, you’ll see that they sometimes mix in a little top-down analysis with their bottom-up approach and vice versa. There’s no rule against doing that, but I would rather look at things from two totally different perspectives.

When using a bottom-up approach, try to start with the most simplistic piece of firm information you can get your hands on. Then, start to build on it with other information, or the best guess you can muster.

You can think of a bottom-up approach as one that focuses on how much and how often customers will buy.

This information might be something you have internally. Or, it might be from the information you found by researching online. Start with a single “serving size” of your product/service. Then, think about how often a customer would buy. Work your way up from there.

A bottom-up approach for my business plan

As mentioned in earlier posts about business plans – I’m building one as I write these. My theoretical product is an all-natural topical hair loss treatment.

In the post linked above, I performed something of a top-down analysis of market size for a business plan. I later discovered that I was operating with incomplete information .

There’s still a lot to consider regarding packaging volume and dosage. That will require more thought. But, for the time being, I’m going to estimate the volume of a one month’s supply and the daily dosage to be the same as Rogaine. If that changes as I progress with my business plan, I can easily circle back to this and plug in different numbers.

With Rogaine as my benchmark, I know that a dosage of my product would be 1 mL. The product would be used twice a day. My product would come in 2 oz (60 ml) bottles. Each bottle would be one month’s supply, as I said.

Thinking about capacity

Okay. Now that I have a grasp on the package size – what about blending and packaging? If this idea were to come to fruition, I don’t picture myself blending batches in my bathtub and filling bottles with a ladle and a funnel. I would need access to some sort of industrial equipment.

Fortunately, a quick internet search shows that there is no shortage of contract blenders and packagers out there. Especially for food and supplements. What it costs, remains to be seen. That’s an issue for another time. For now, I just want to get an idea of how much I could manufacture.

This company claims it can blend 1.25 million pounds per workday. We’ll assume, for now, this represents the average contract blender/packager. What does that translate into in terms of 2 oz bottles?

First of all, I wouldn’t need all 26 of their kettles. Only one, tops, especially at startup. So, if we divide the 1.25 million pounds by 26, we get a per kettle capacity of about 48,000 lbs per day.

Pounds are a weight unit of measure (UOM) and ounces are a volume UOM. To make the conversion, we’re going to have to do some more estimating.

Water weighs a little over 8 lbs/gallon. We’ll assume my product has roughly the same density.

8 lbs ÷ 128 oz (per gallon) = .0625 lbs/oz. With each bottle containing 2 oz, we know that it’ll weigh approximately .125 lbs/bottle.

This means that with one of this company’s kettles, I could blend 384,615 bottles worth of product per day. 96.5 million bottles per year. At an approximate sales price of $7.50 per bottle, that translates into nearly $725 million in revenue per year.

Okay, I’ve looked at things from a bottom-up, capacity-focused approach. Let’s now consider a top-down, demographic-focused analysis.

Top-down analysis

Not surprisingly, I also wrote a post on InvestSomeMoney.com with examples of a top-down analysis to determine market size for a business plan . When you read through it, you might notice that some of the examples use Census data (or something similar). They take big chunks of information and start narrowing down their market from there.

Which brings us to three important terms for performing a top-down analysis. These are:

Total addressable market (TAM) Serviceable available market (SAM) and Serviceable obtainable market (SOM)

A SOM is a fraction of the SAM. In turn, a SAM is part of the TAM.

The TAM can be thought of as every potential customer that you can reach geographically. The SAM is what’s left when you niche down a little into the population that is a good fit for your unique selling proposition. Finally, the SOM represents the percentage of the SAM you can realistically expect to take.

It’s unlikely that you will ever capture 100% of the SAM. Even in a specific niche, you can’t be everything to everyone. That’s alright, though. The goal of this exercise is to make realistic estimates so that you have a sound business plan to work from.

When doing a top-down analysis, start with a large population or an overall industry size. From there, narrow down your customer until you arrive at your SOM. It helps to have a “customer avatar” in mind before starting a top-down analysis so you know where to niche down to.

I would suggest you perform a business plan demand analysis first to get a crystal clear picture of what that avatar is. You might think you know it intuitively. But you might be surprised at what you find – like I was!

A top-down analysis for my business plan

I know that not every person in the U.S. (much less the world) is going to want or need an all-natural topical supplement for hair loss. Who might though???

I’ll refer back to my handy-dandy business plan demand analysis (linked above) to see what I can find.

Here, I’m reminded of the ages that men and women first started experiencing hair loss. I’m reminded of the percentage that has sought any sort of treatment. Finally, I’m given an idea of what types of treatment they have tried.

A quick visit to Data.Census.Gov and I find table S0101, which gives me the U.S. population by age and sex. I customize and filter the table real quick. Then, I copy and paste the data I need into my spreadsheet.

Next step is to narrow these numbers down. I’ll use the “regular” numbers and the pessimistic numbers from sensitivity analysis from my business plan demand workbook .

I want to know the percentage of men who have had hair loss and tried any sort of treatment. Then, I want to go deeper and estimate the number that has found supplements to be effective. I’ll do this for both the most-likely and the worst-case scenarios. On the women’s side, I’ll do, more or less, the same thing.

TAM and SAM

You’ll see that I didn’t use the same age ranges for men and women. I assumed that males would start experiencing hair loss earlier, but would also stop caring about it earlier too.

The age range for males in my TAM was 20 – 54. For females, it was 25 – 59. This translates into a TAM of 151 million people in the U.S.

For the SAM, my worst-case scenario estimated that .9% of the male population in the target age ranges would be part of my market. 1.54% of females in the target age ranges were also assumed to be part of my market. This translated into a worst-case SAM of 1.8 million people.

As for my most-likely SAM, I estimated that 1.41% of males and 2.4% of females in the target age ranges were potential customers. This resulted in a SAM of 2.88 million people. Over a million more potential customers.

SOM is tricky.

Who’s to say what percentage of the SAM my company could capture? Obviously, it would start at 0% and work its way up from there. Where would it stop though?

It will depend, in part, on the number of companies vying for this niche. As I often do, I will refer to the Pareto principle. The Pareto principle states that 20% of the inputs will be responsible for 80% of the outputs. Put another way, 20% of the companies will have roughly 80% of the market share.

I’ll refer back, again, to my post on business plan demand. In it, I found three direct substitutions for my topical hair loss product. I won’t include Minoxidil (Rogaine) in that group, because of its unnatural chemistry.

Again, without getting too mired in math, I estimate that there are approximately thirty companies in the topical hair loss supplement space. This was a quick and dirty estimate based on the results of an internet search.

Six of those thirty companies probably control 80% of the market. That leaves 4.2% (1 ÷ 24) of the remaining 20% as my short-term SOM. Obviously, if my product were to take off, that amount could grow considerably and could approach the SAM.

What that means as far as the market size is 15K people worst-case and 24K people most-likely. At 12 bottles purchased per year, this translates into 184K and 287.5K bottles per year respectively.

Here’s a look at the spreadsheet breaking that all down:

Comparing a bottom-up and top-down analysis when determining market size for a business plan

Obviously, a couple hundred thousand bottles (top-down) is a far cry from 96.5 million (bottom-up). So, it would appear I will not be capacity constrained in the near future. In fact, as this startup moves forward, I need to make sure I’m not over-buying capacity. Those huge fixed costs could kill my business before it has a chance to get off the ground.

Speaking of fixed costs, the information from this analysis has given me good data to build my pro forma financials – when that time comes.

Now, at some point in the future, selling my product internationally could be an option. However, in this tiny niche, it is unlikely that I’ll ever need that much capacity for this one product.

Market size for a business plan

What were there factors I didn’t consider (but should have) when estimating my potential market size?

How might you have approached this differently?

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Home • Knowledge hub • What is market size and why is it important?

What is market size and why is it important?

Market size is a metric that gets discussed a lot in the world of business, but what is market size and what does it actually mean?

There are a lot of misconceptions and a lot of confusion around the real meaning of the term, which can result in people making the wrong decisions or failing to make the most of their strategy.

If you can accurately determine your market size, this gives you a big advantage from day one. It allows you to secure better investment, make more clear-headed plans, and avoid getting sucked into a strategy that simply has no future.

In this article, we’ll break down the basics of market size, and show you how to determine yours and differentiate it from some other concepts.

What is market size?

Essentially, market size refers to the total number of potential buyers for your product. The most common misunderstanding marketers and researchers have about market size is confusing it with the total population of a region or country. Choosing a market based on high population density can be misleading, and does not guarantee the success of your product’s launch. Just because a market has a lot of people residing in it does not necessarily mean that sales will be more than a smaller market with more matches to your target audience.

Alexa defines market size as “the number of individuals in a certain market segment who are potential buyers.”

More technically, it’s the total number of potential customers or sales in a given period (usually a year), or the total potential revenues you can reach in that time.

Why is market size important?

Understanding the size of an existing or potential new market is important for many reasons.

If sales growth is languishing or seems to have reached its peak, one explanation might be the size or potential of the market. The is no reason to keep investing in an existing market if your target audience in that market is not growing or declining.

If you are looking at entering a new market, whether that is locally or internationally, understanding the size of that market, in terms of how many potential buyers there are is an important consideration. Entering a market with a small pool of targets or personas could mean that your product or sales launch falls below expectations, or worse still fails to launch wasting both time and money.

Understanding market size is also important when determining a market’s potential. You may have the opportunity to launch your product in multiple markets. Strategically it makes the most sense to choose a market rich in potential customers. Understanding the potential of a new market also helps formulate pricing strategies, distribution channels and marketing strategies and campaigns.

When you understand the size of a potential market, launching your product or service becomes less of a risk and more of a calculated and strategic investment. If you do not know the size of a market with a high degree of certainty, you should not gamble launching in that market.

There are many reasons why you should be interested in your market size and how to accurately determine it. Here are some of the main reasons:

• Gaining investment.   Market size is an indicator of the potential for any new business, product or service. If you can show that you have a good chance of making money — and how much — it’ll be much easier to secure investment.
• Develop a solid marketing and business strategy. Knowing who your market is, how big they are, and how much money they represent gives you a strong foundation for building a strategy and setting clear future goals.
• Determine budget and hiring plans. Knowing your potential trajectory for growth helps you budget more accurately and hire the right team for the task ahead.
• Use your Research and Development (R&D) budget wisely by better understanding who your customers are, what they want, and how you can deliver it.

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How to determine market size

So how do you actually figure out your market size? There are a number of ways to go about this:

• Clearly identify the target market for your product or service
• Carry out market research to assess the level of interest in what you’re offering — will people buy it?
• Gather data on the number of potential customers and transactions per year. There are a number of secondary resources you can consult to help you do this.
• Assess the total revenue generated in that segment of the economy in a given year

Is your market size too small?

So — you’ve calculated your market size, but what does that number mean? How do you know if your business is worth pursuing?

The answer depends very much on the market and the size of your business, but there are some good general guidelines. Usually, $100 million is on the lower end , and if your market size is smaller than this it may prove difficult to convince stakeholders or investors to get on board.

What is the serviceable obtainable market?

Determining your total market size is only the beginning, and this information alone isn’t worth much.

This is because you’ll never be able to reach literally every potential customer. There’s just no way. No business has the marketing tools, scale, and budget to reach every single person in their market.

And that’s without even mentioning competitors. You’ll never corner an entire market, and the most you can hope for is usually a small slice. According to Tx Zhuo of Karlin Ventures “If it’s 1 to 5 percent of the pie, you have a realistic plan.”

This is where we can turn to a useful metric called serviceable obtainable market (SOM). This refers to the potential customers (and potential revenue) you can realistically hope to reach with your marketing tools and budget.

So how can you calculate your SOM?

How to calculate the serviceable obtainable market

There are a number of ways to calculate your SOM. According to Jared Sleeper , an investor in early-stage companies, there are three main approaches you can take.

• Top-down. This approach relies on the predictions, forecasts, and assumptions about your market from analysts like Gartner. It’s often based on conjecture and estimates to some extent. Think of statements like: “The wireless headset market is forecast to reach $2.5 billion by 2023”. It’s good for a general overview of the situation, but it’s a little vague and can be challenging to understand what proportion of the market you can realistically corner. 
• Bottom-up. This involves starting with your price and how many units you can realistically expect to sell. How many customers can you reach + how much is each sale = your SOM. It’s more tailored to your specific situation instead of just a broad assessment of the market as a whole, so in this sense, it’s a more reliable way to work out your SOM.
• Value theory. This final strategy is a little less precise, but it still has some usefulness. It involves considering the value your product or service adds compared to alternatives and estimating how much customers would be prepared to pay for that extra value.

Sleeper recommends options 2 and 3 since they actually consider the specifics of your business and how you would interact with the market, as opposed to a general prediction. It may make sense to use a blend of all three approaches to gain the fullest picture of your SOM and provide as much insight as possible to your stakeholders or investors.

Calculating market size is an important step on the road to building a successful business or launching a new product or service. However, it’s only one step. The metric on its own isn’t worth a whole lot unless you can also show how much of that market you can reach and compete for.

Market research is a crucial part of determining your market size, SOM, and laying the foundations for a successful business. To find out how Kadence can help you with this, take a look at our market sizing services or get in touch with us today.

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Market Size Calculator (With AI Summary)

Whether you're a seasoned entrepreneur or a budding startup enthusiast, understanding your potential market size is crucial. It helps validate your business idea, attracts investors, and forms the backbone of your business plan. But how do you estimate market size without spending a fortune? Let's explore the principles of market sizing and introduce our free Market Size Calculator tool.

What is Market Size?

‍ Market size refers to the number of potential customers or the total revenue potential for your product or service. It gives you an idea of the potential growth and profitability of your business idea.

Top-Down vs. Bottom-Up Approach

• Top-Down : This method begins with a broader view, usually a global or national statistic, and then narrows down. For instance, if you're starting a makeup brand, you'd look at the global beauty market's value and estimate your brand's potential share.
• Bottom-Up : This starts with granular data, perhaps a survey or pilot, and then scales it up. If you sold 100 products in a test market of 10,000 people, you'd predict sales for a larger population.

Factors to Consider

• Segmentation : Segment your market by age, location, gender, interests, etc., to get a clearer picture.
• Growth Rate : Understand how fast your industry or target market is growing. A stable market might mean less potential, but also less volatility.
• Market Trends : Stay updated with industry trends. For instance, a growing trend towards remote work might mean an increasing market for home office supplies.

Best Practices and Tips

• Use Multiple Sources : Don’t rely on just one statistic or survey. Using various data sources can give a more accurate picture.
• Stay Updated : Markets change. Regularly update your data, especially if there's a significant shift in the industry.
• Validate with Primary Research : After your secondary research (existing data), validate your findings with primary research, such as surveys or interviews.
• Consider the Competition : While assessing the market size, remember that you're not alone. Factor in competitors and their market share.

Using Our Free Market Size Calculator Tool

Our easy-to-use Market Size Calculator tool provides a quick estimate based on the inputs you provide. Here's how to utilize it:

• Business Idea : Describe your business idea briefly. This gives context to the estimation.
• Target Geography : Select where you plan to operate or sell. This could be as specific as a country or as broad as globally.
• Trend : Is your industry growing, stable, or declining? Your estimate will be adjusted based on this trend.
• Characteristic Traits : Mention specific traits of your target market. This helps in refining the estimate. For instance, if you're selling a high-end tech gadget, traits like "Tech enthusiasts" or "High income" might be relevant.
• Click 'Estimate Market Size' : Once you've filled in the relevant fields, hit the button. Don’t worry if you're unsure about some inputs; you can leave them blank.
• Interpret the Results : GPT-4 will generate an estimate and a summary. This result considers various factors based on the inputs provided. It gives you an immediate sense of potential reach and revenue.

Estimating your target market size doesn’t have to be a daunting task. With the right understanding and tools, you can get a fairly accurate picture without investing in expensive research. Our free Market Size Calculator tool, powered by GPT-4, simplifies this process, providing entrepreneurs with valuable insights within seconds. Whether you're drafting a business plan, seeking investment, or just evaluating an idea, understanding your market size is the first step towards entrepreneurial success.

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Analyze your market like a pro with this step-by-step guide + insider tips

Don’t fall into the trap of assuming that you already know enough about your market.

No matter how fantastic your product or service is, your business cannot succeed without sufficient market demand .

You need a clear understanding of who will buy your product or service and why .

You want to know if there is a clear market gap and a market large enough to support the survival and growth of your business.

Industry research and market analysis will help make sure that you are on the right track .

It takes time , but it is time well spent . Thank me later.

WHAT is Market Analysis?

The Market Analysis section of a business plan is also sometimes called:

• Market Demand, Market Trends, Target Market, The Market
• Industry Analysis & Trends, Industry & Market Analysis, Industry and Market Research

WHY Should You Do Market Analysis?

First and foremost, you need to demonstrate beyond any reasonable doubt that there is real need and sufficient demand for your product or service in the market, now and going forward.

• What makes you think that people will buy your products or services?
• Can you prove it?

Your due diligence on the market opportunity and validating the problem and solution described in the Product and Service section of your business plan are crucial for the success of your venture.

Also, no company operates in a vacuum. Every business is part of a larger overall industry, the forces that affect your industry as a whole will inevitably affect your business as well.

Evaluating your industry and market increases your own knowledge of the factors that contribute to your company’s success and shows the readers of your business plan that you understand the external business conditions.

External Support

In fact, if you are seeking outside financing, potential backers will most definitely be interested in industry and market conditions and trends.

You will make a positive impression and have a better chance of getting their support if you show market analysis that strengthens your business case, combining relevant and reliable data with sound judgement.

Let’s break down how to do exactly that, step by step:

HOW To Do Market Analysis: Step-by-Step

So, let’s break up how market analysis is done into three steps:

• Industry:  the total market
• Target Market: specific segments of the industry that you will target
• Target Customer: characteristics of the customers that you will focus on

Step 1: Industry Analysis

How do you define an industry.

For example, the fashion industry includes fabric suppliers, designers, companies making finished clothing, distributors, sales representatives, trade publications, retail outlets online and on the high street.

How Do You Analyze an Industry?

Briefly describe your industry, including the following considerations:

1.1. Economic Conditions

Outline the current and projected economic conditions that influence the industry your business operates in, such as:

• Official economic indicators like GDP or inflation
• Labour market statistics
• Foreign trade (e.g., import and export statistics)

1.2. Industry Description

Highlight the distinct characteristic of your industry, including:

• Market leaders , major customer groups and customer loyalty
• Supply chain and distribution channels
• Profitability (e.g., pricing, cost structure, margins), financials
• Key success factors
• Barriers to entry preventing new companies from competing in the industry

1.3. Industry Size and Growth

Estimate the size of your industry and analyze how industry growth affects your company’s prospects:

• Current size (e.g., revenues, units sold, employment)
• Historic and projected industry growth rate (low/medium/high)
• Life-cycle stage /maturity (emerging/expanding/ mature/declining)

1.4. Industry Trends

• Industry Trends: Describe the key industry trends and evaluate the potential impact of PESTEL (political / economic / social / technological / environmental / legal) changes on the industry, including the level of sensitivity to:
• Seasonality
• Economic cycles
• Government regulation (e.g. environment, health and safety, international trade, performance standards, licensing/certification/fair trade/deregulation, product claims) Technological change
• Global Trends: Outline global trends affecting your industry
• Identify global industry concerns and opportunities
• International markets that could help to grow your business
• Strategic Opportunity: Highlight the strategic opportunities that exist in your industry

Step 2: Target Customer Identification

Who is a target customer.

One business can have–and often does have–more than one target customer group.

The success of your business depends on your ability to meet the needs and wants of your customers. So, in a business plan, your aim is to assure readers that:

• Your customers actually exist
• You know exactly who they are and what they want
• They are ready for what you have to offer and are likely to actually buy

How Do You Identify an Ideal Target Customer?

2.1. target customer.

• Identify the customer, remembering that the decision-maker who makes the purchase can be a different person or entity than the end-user.

2.2. Demographics

• For consumers ( demographics ): Age, gender, income, occupation, education, family status, home ownership, lifestyle (e.g., work and leisure activities)
• For businesses ( firmographic ): Industry, sector, years in business, ownership, size (e.g., sales, revenues, budget, employees, branches, sq footage)

2.3. Geographic Location

• Where are your customers based, where do they buy their products/services and where do they actually use them

2.4 Purchasing Patterns

• Identify customer behaviors, i.e., what actions they take
• how frequently
• and how quickly they buy

2.5. Psychographics

• Identify customer attitudes, i.e., how they think or feel
• Urgency, price, quality, reputation, image, convenience, availability, features, brand, customer service, return policy, sustainability, eco-friendliness, supporting local business
• Necessity/luxury, high involvement bit ticket item / low involvement consumable

Step 3: Target Market Analysis

What is a target market.

Target market, or 'target audience', is a group of people that a business has identified as the most likely to purchase its offering, defined by demographic, psychographic, geographic and other characteristics. Target market may be broken down to target customers to customize marketing efforts.

How Do You Analyze a Target Market?

So, how many people are likely to become your customers?

To get an answer to this questions, narrow the industry into your target market with a manageable size, and identify its key characteristics, size and trends:

3.1. Target Market Description

Define your target market by:

• Type: B2C, B2B, government, non-profits
• Geographic reach: Specify the geographic location and reach of your target market

3.2. Market Size and Share

Estimate how large is the market for your product or service (e.g., number of customers, annual purchases in sales units and $ revenues). Explain the logic behind your calculation:

• TAM (Total Available/Addressable/Attainable Market) is the total maximum demand for a product or service that could theoretically be generated by selling to everyone in the world who could possibly buy from you, regardless of competition and any other considerations and restrictions.
• SAM (Serviceable Available Market) is the portion of the TAM that you could potentially address in a specific market. For example, if your product/service is only available in one country or language.
• SOM (Service Obtainable Market / Share of Market) is the share of the SAM that you can realistically carve out for your product or service. This the target market that you will be going after and can reasonably expect to convert into a customer base.

3.3. Market Trends

Illustrate the most important themes, changes and developments happening in your market. Explain the reasons behind these trends and how they will favor your business.

3.4. Demand Growth Opportunity

Estimate future demand for your offering by translating past, current and future market demand trends and drivers into forecasts:

• Historic growth: Check how your target market has grown in the past.
• Drivers past: Identify what has been driving that growth in the past.
• Drivers future: Assess whether there will be any change in influence of these and other drivers in the future.

How Big Should My Target Market Be?

Well, if the market opportunity is small, it will limit how big and successful your business can become. In fact, it may even be too small to support a successful business at all.

On the other hand, many businesses make the mistake of trying to appeal to too many target markets, which also limits their success by distracting their focus.

What If My Stats Look Bad?

Large and growing market suggests promising demand for your offering now and into the future. Nevertheless, your business can still thrive in a smaller or contracting market.

Instead of hiding from unfavorable stats, acknowledge that you are swimming against the tide and devise strategies to cope with whatever lies ahead.

Step 4: Industry and Market Analysis Research

The market analysis section of your business plan should illustrate your own industry and market knowledge as well as the key findings and conclusions from your research.

Back up your findings with external research sources (= secondary research) and results of internal market research and testing (= primary research).

What is Primary and Secondary Market Research?

Yes, there are two main types of market research – primary and secondary – and you should do both to adequately cover the market analysis section of your business plan:

• Primary market research is original data you gather yourself, for example in the form of active fieldwork collecting specific information in your market.
• Secondary market research involves collating information from existing data, which has been researched and shared by reliable outside sources . This is essentially passive desk research of information already published .

Unless you are working for a corporation, this exercise is not about your ability to do professional-level market research.

Instead, you just need to demonstrate fundamental understanding of your business environment and where you fit in within the market and broader industry.

Why Do You Need To Do Primary & Secondary Market Research?

There are countless ways you could go collecting industry and market research data, depending on the type of your business, what your business plan is for, and what your needs, resources and circumstances are.

For tried and tested tips on how to properly conduct your market research, read the next section of this guide that is dedicated to primary and secondary market research methods.

In any case, tell the reader how you carried out your market research. Prove what the facts are and where you got your data. Be as specific as possible. Provide statistics, numbers, and sources.

When doing secondary research, always make sure that all stats, facts and figures are from reputable sources and properly referenced in both the main text and the Appendix of your business plan. This gives more credibility to your business case as the reader has more confidence in the information provided.

Go to the Primary and Secondary Market Research post for my best tips on industry, market and competitor research.

7 TOP TIPS For Writing Market Analysis

1. realistic projections.

Above all, make sure that you are realistic in your projections about how your product or service is going to be accepted in the market, otherwise you are going to seriously undermine the credibility of your entire business case.

2. Laser Focus

Discuss only characteristic of your target market and customers that are observable, factual and meaningful, i.e. directly relate to your customers’ decision to purchase.

Always relate the data back to your business. Market statistics are meaningless until you explain where and how your company fits in.

For example, as you write about the market gap and the needs of your target customers, highlight how you are uniquely positioned to fill them.

In other words, your goal is to:

• Present your data
• Analyze the data
• Tie the data back to how your business can thrive within your target market

3. Target Audience

On a similar note, tailor the market analysis to your target audience and the specific purpose at hand.

For example, if your business plan is for internal use, you may not have to go into as much detail about the market as you would have for external financiers, since your team is likely already very familiar with the business environment your company operates in.

4. Story Time

Make sure that there is a compelling storyline and logical flow to the market information presented.

The saying “a picture is worth a thousand words” certainly applies here. Industry and market statistics are easier to understand and more impactful if presented as a chart or graph.

6. Information Overload

Keep your market analysis concise by only including pertinent information. No fluff, no repetition, no drowning the reader in a sea of redundant facts.

While you should not assume that the reader knows anything about your market, do not elaborate on unnecessary basic facts either.

Do not overload the reader in the main body of the business plan. Move everything that is not essential to telling the story into the Appendix. For example, summarize the results of market testing survey in the main body of the business plan document, but move the list of the actual survey questions into the appendix.

7. Marketing Plan

Note that market analysis and marketing plan are two different things, with two distinct chapters in a business plan.

As the name suggests, market analysis examines where you fit in within your desired industry and market. As you work thorugh this section, jot down your ideas for the marketing and strategy section of your business plan.

Final Thoughts

Remember that the very act of doing the research and analysis is a great opportunity to learn things that affect your business that you did not know before, so take your time doing the work.

Related Questions

What is the purpose of industry & market research and analysis.

The purpose of industry and market research and analysis is to qualitatively and quantitatively assess the environment of a business and to confirm that the market opportunity is sufficient for sustainable success of that business.

Why are Industry & Market Research and Analysis IMPORTANT?

Industry and market research and analysis are important because they allow you to gain knowledge of the industry, the target market you are planning to sell to, and your competition, so you can make informed strategic decisions on how to make your business succeed.

How Can Industry & Market Research and Analysis BENEFIT a Business?

Industry and market research and analysis benefit a business by uncovering opportunities and threats within its environment, including attainable market size, ideal target customers, competition and any potential difficulties on the company’s journey to success.

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Home > Financial Projections > Market Size Estimation

Market Size Estimation

In order to prepare a business plan for investors you need to be able to estimate the size of your potential market. A market size estimation is a useful exercise as it will allow you to determine whether the new business is a feasible proposition, and will provide you with some of the information needed to generate a sales forecast for the financial projection.

• Government census information
• Trade associations
• Industry reports
• Trade shows
• Competitors
• Demographic reports
• Business acquisitions and sales
• Traffic studies

Market Size Estimation Using Local Data

For the first of our market size estimation examples, lets assume that you plan to open a restaurant in your local area. If the local area is of sufficient size (say a major town or city), then the sources of information above may well provide the necessary information to estimate the market size.

The local market size estimation is 18,000,000 with average sales of 144,000 per restaurant.

In the absence of any other information, and providing the business has the facilities and is capable of managing such sales, it is reasonable to assume that a new restaurant might eventually achieve this average sales figure.

It is important at this stage to point out that a bottom up sales forecast should also be carried out to ensure that the restaurant has the capacity to achieve such a sales forecast. Our revenue templates are available to help with the process of performing a bottom up sales forecast.

Market Size Estimation when Local Data is not Available

The local area under consideration might be too small for information to be available. In these circumstances, an alternative approach can be adopted based on information for a larger region (for example information might be available for a state or county but not for individual towns).

Let’s assume that we plan to open a coffee shop business, and the information available is that the entire region has sales of 98,000,000 and the census shows that the population of the region is 1,050,000.

From this information we can calculate the average sales per head of population in the region.

We now know that on average the spend in coffee shops is 93.33 for each member of the population.

Using this information, and knowing the local population in the area being considered is say 40,000, we can estimate the size of the local market.

The local market size estimation is 3,733,333 with average sales of 93.33 per head of population.

By using this figure and a target percentage the business aims to achieve, a sales forecast for the business can be obtained.

The point of this method of estimating market size is that although local sales information might not be available, it is possible using national information to obtain an estimate of the average spend per head of population (93.33), and then using the local area population (however small) an estimate of the local market size can be obtained.

Calculating Market Size for a Business to Business Operation

For businesses which trade with other businesses where the population is not directly a relevant factor, a variation on the above method can be used to provide a market size estimation when local sales information is not available.

Lets assume that we plan to open a business operating in the business to business sector, the information available from market size by industry reports is that the entire sector has sales of 7,546,000,000 and that there are 350,000 businesses operating in this sector.

From this information we can calculate the average sales per business as follows.

We now know that on average the sales for each business in the sector is 215,600.

Using this information and knowing how many businesses there are in the local area being considered (say 60), we can estimate the size of the local market.

The local market size estimation is 12,936,000 with average sales of 215,600 per business.

Again, by using this figure discounted by a percentage to allow for the fact that this is a start up business, an estimate of the initial sales forecast can be obtained

Market Saturation Point

Starting a business on the assumption that the market place will get bigger to accommodate you is a dangerous game. More often than not, the market will stay the same and the business you get will be at the expense of competitors.

Having carried out your market size estimation, it is important to check that the local market is big enough for additional businesses to enter.

In our coffee shop business example above, suppose that there were 500 coffee shops in the region with the population as before of 1,050,000. The average population per coffee shop can be calculated as follows:

We know from above that the local population is 40,000, so we can estimate based on the regional information that the number of coffee shops which can be supported by the local community is:

By checking the number of coffee shops actually operating in the area to see whether it is anywhere near 19, it is now possible to see whether the market is saturated or whether there is room for another business.

For example, if there were already 15 coffee shops operating in the area, we could say there is room for another 4 to open, and that the local market is under-utilized by 4/19 x 100% = 21% of the businesses it can support.

Market Size Estimation and Break Even

An alternative method of deciding whether the market is suitable for a new business, is to calculate the break even sales of your business and see what percentage of the total population you would need to capture in order to break even.

Again using the coffee shop business as an example, suppose the fixed operating costs of the business were 95,000 and the gross margin percentage is 60%, then the break even sales are calculated as follows:

But we already know from regional information that the average spend per head of population is 93.33, so the break even population is given by:

We now know that the coffee shop needs a population of 1,696 or 4.2% (1,696/40,000 ) of the local population to break even. In addition, on the basis that we know from above that the average population per business is 2,100, this new business would need to achieve 81% (1,696/2,100) of the industry average just to break even.

However, we also know from our market saturation calculation, that the market is underutilized by 21%. The decision now based on this information, is whether or not you believe this is achievable.

Our market size calculator is available as a free Excel download to help carry out the market size estimation calculations.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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What Is an Industry Size Business Plan?

An industry size business plan is necessary for budgeting and marketing, especially for those who will seek third-party financing. 3 min read updated on February 01, 2023

An industry size business plan is necessary for budgeting and marketing, especially for those who will seek third-party financing. Most venture capitalists want to know the potential size of the market for the businesses they're investing in. Ultimately, the size of the potential market for the products or services your business is offering determines the value of your business, and to most venture capitalists, the larger that market, the better.

TAM, or Total Available Market, refers to the maximum size of the market for a business's offerings, and it may include both people and revenue. SAM, or Served Available Market, refers to the segment of the TAM consisting of people who will be able to use the business's solution. The SAM will be the business's target market.

Market Size Presentation

The section of your business plan pertaining to market size can be presented in any number of ways. One of the easiest ways to do this is with a simple columnar format that outlines the TAM and SAM now and in five years. This will allow the investor to quickly determine the potential size of the market and its growth over the course of your business plan.

While sizing of the market is important, it is only a plan. The market size section of your business plan can only provide an educated guess at how large the available market will be. This is your opportunity to demonstrate your plans for a successful launch and continued growth.

Available Data and Statistics

Market sizing is largely based on trade association data and any other available statistics. Begin with verifiable base data, including government statistics when available. Cross-reference your information with alternative sources whenever possible. Make sure that your findings make sense.

You should also be specific. For example, you wouldn't want to say, "There are millions of properties in the world with pools, and if we take a small percentage of that, our business plan will work." Rather, keep the industry definition very narrow.

Your analysis will differ depending on whether or not you're dealing with a pre-existing market or a new market. If you're dealing with an existing product, there will be industry and market data available to you. If you're dealing with a new product , you may need to conduct market research, consult with potential customers, and go from there.

Determining Your Market Size

Determining your market size will help you make a clear distinction between two categories:

• Addressable market - the total revenue opportunity for your product or service
• Available market - the portion of the addressable market you can realistically compete with

If you don't have a firm grip on your market size, you'll put your business's success at risk, both in these early stages and through its life cycle.

Estimating Your Market Size

Market sizing will allow you to gain a sense of current market trends. It can help you uncover the drivers of demand, since movements or changes in the market tend to continue for a period of time. Furthermore, studying these trends can reveal whether there's another product on the way that could potentially affect your market size.

When estimating market size, the best place to start is to consider the problem you intend to solve and how much value your product or service will have to consumers. This is actually something many entrepreneurs tend to overlook because they become engrossed in the product they've developed and not its benefits to the audience.

To estimate your market size, follow these steps:

• Clearly define the customer you're targeting.
• Estimate how many customers you will be targeting.
• Figure out your penetration rate.
• Calculate both the volume and the value to your potential market size.
• Apply the data.

Determining Your Market Potential

It doesn't matter if you're seeking third-party financing or not. Understanding the potential for your market will help you in the following areas:

• Product development
• Organizational design
• Distribution
• Partnerships
• Employee skills

Beyond this, understanding your market potential will help you address more mundane issues, such as selecting a bank, hiring an account, or seeking legal counsel .

If you need help with your industry size business plan, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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