So after you have your idea – it is time to clearly define your market size in order to find out the potential of your business. Is it worth getting into?
Why is this important? You need to know the size of the market right in the beginning because this is not only impressive to the investors but also a very important metric for you to base a decision whether it is a right market to get into and there are enough people who need your product or a service, so your business can make money and grow.
As a result you should be able to answer those three questions:
What is the total size of the market (TAM – Total addressable market)
What is the size of the Segmented Addressable Market (SAM) – the segment you are planning to target
What is the SOM – your share of the market? The share which you can realistically reach.
First steps. It is sometimes tricky to set a definite number on the market size, because there might not be any openly available information out there or you are creating a completely new segment. However, this should not stop you. There are few useful tools which I have used which will give you an initial idea. When i was starting i didnt have a lot of this tools however nowadays you can get incredible insights into a market by using google and its for free!
Google Keyword tool – to access it you need to create a Google Adwords account. After logging in under “Tools” you will find “Keyword planner”. Try to type in different combinations of how your potential client could find your business and see the search volume in your country.
Google Market finder is another useful tool which you could use to access the potential of your business in other countries. Just type in your keyword and you will be shown what the search volumes for your keyword in other countries are. Maybe you need to think a little bigger and start your business in multiple countries.
Reports – search for reports which give an overview of your market size. Try searching for reports in other countries if you do not find one for your country. In combination with Google Keyword tool you will come up with a rough estimate. Tip: if you are still at the university, you might have access to many business data basis, check those before purchasing any reports.
Another way to access your market is to look at your competition. The best tool for it is “Similiarweb” website, where you can type in the website of your competitor and see the estimated traffic they have.
You will need to also estimate a conversion rate – which is how many of the visitors to their website they can convert into a paying customer. This number can vary depending on the type of business and the usability of the website. From my experience the conversion rate for a online store would be approximately 1-3% from all uniques visitors.
Next step would be to define the average check – how much would your potential customer spend on the similar products or services or on the alternative product. After you have this figure multiply the average check on the total amount of people who need this product (per year) and you will get the Total Addressable market.
After you have the Total market, define the segment you are looking into. For example, there is a total market for Hotelery of X bn USD, the segment I want to target is Hostel visited by young travellers, who are looking for a cheaper and more fun accommodation than hotels. The Hostel segment is X % of the Total Hotelery market which amounts to X bn USD.
After you have defined the Segment you want to target, carefully consider which share of the market you are planning to take up. Please consider why you can take this share – what do you do better than competitors? Is the market big enough for a new commer? Will this share be enough for you to make money?
You have to be maximum realistic, over or underestimating your business might lead to it failing in the early stage, because out of this prognoses we will later build the financial plan. It is always best to consider three scenarios, the best case, the middle case and the worst case.
I would like to give a word of caution to you. Please do not spend too much time on researching the market. Spending few days or even a week is fine to give you a good overview and confidence that you know what you are getting into, however spending months on it might not be a good idea. You will get insights into the market much quicker if you get to business and start talking to your potential clients, partners or industry experts. So wrap it up and get down to business.
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