FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Market size

Updated on March 19, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Market Size?

Market size refers to a specific market’s total number of potential customers measured in terms of sales, or revenue. Its primary purpose is to understand a market’s revenue-generating potential comprehensively. Its analysis helps businesses identify their potential customer base while assessing the level of competition they face from rival companies.

Market Size

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Market size (wallstreetmojo.com)

Market size considerations are crucial when firms formulate business strategies such as expansion, liquidation, or contraction. It can be quantified in various ways, including the total number of buyers or sellers within a market or by calculating the total transaction value. Understanding it also provides insights into the potential number of customers and sales a business can expect to capture.

Key Takeaways

  • Market size is the total potential volume of consumers or clients in a specific product segment.
  • It plays an important role for companies in deciding marketing strategies, budgets, and workforce requirements for a particular product.
  • The best way to calculate it is to multiply the product demand by the price per product.
  • Market cap means a company’s net worth; market share means a company’s share in a market; and market size means the total potential customers available for a company’s product.

Market Size Explained

Market size encompasses the total number of consumers or potential buyers within a specific market segment. Knowledge of market size is instrumental in attracting investments based on projected sales and revenue within the market. Examining it is essential for businesses for several reasons:

  • It enables businesses to allocate an appropriate budget for marketing efforts to tap into new customer base and revenue sources effectively.
  • Once a business determines its market size and marketing budget, it can develop highly effective strategies to boost sales, expand its customer base, and enhance long-term revenue prospects.
  • Market volume data helps firms gauge the staff and resources required to capture a significant market share.

When sizing a market, firms should include every potential customer within their target market. Additionally, various factors can influence market size, including seasonal fluctuations, economic conditions, geopolitical events, changes in consumer demographics, and government policies. Understanding market size is crucial for businesses to make informed decisions, secure investments, allocate resources effectively, and develop successful marketing strategies within their respective markets.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

How To Estimate?

Estimating involves a structured framework, which typically consists of the following steps:

  • Define the Market: Start by clearly outlining the area and type of market one is interested in. Decide where it’s located and what kind of market it is. This precise definition is crucial for collecting accurate data.
  • Collect Data: Once the market is identified, gather detailed information about it. This should include data on potential customers, competitors, and market trends. Thorough data collection is vital for accurate estimation.
  • Analyze Data: After collecting the data, analyze it systematically. This step helps understand key market aspects, like the number of potential customers, growth rate, and volume. Use techniques like regression, cluster, or trend analysis to gain insights.
  • Estimate Market Size: Now, calculate the market size based on the insights from the data analysis. There are two common approaches: The top-down approach begins with the total market size and then figures out the portion a business can capture. Calculate the market share based on one’s business’s capabilities and resources. The bottom-up approach takes a more detailed view. Identify factors that affect the business, like where products are sold, the number of potential customers, and the competitors’ historical sales.

Formula

One of the important formulas is the following:

Market Size = Total Population or Total Potential Customers × Average Spending per Customer

It includes estimating the total number of potential customers or the target market’s population and multiplying it by the average amount each customer spends on the product or service.

Calculation Example

Let us assume:

Total population in the target market area: 1,000,000 people.

Average spending per customer on the new smartphone charger: $10.

Market Size = Total Population × Average Spending per Customer

= 1,000,000 people × $10 per person

= $10,000,000

So, in this example, the estimated market size for the new smartphone charger in the target market is $10,000,000. This means that if all 1,000,000 people in the target market were potential customers and each spent an average of $10 on the charger, the total market size would be $10 million.

Market Size vs Market Share vs Market Cap

The differences between the three are as follows:

Market sizeMarket shareMarket cap
The total size of the market for a product.The portion of the total market captured.The total market value of a publicly traded company’s outstanding shares.
Estimated based on potential customers (TAM).Calculated based on actual sales to customers.Determined by multiplying outstanding shares by the share price.
Expressed in terms of product volume, market value, or potential revenue.Expressed as a percentage, determining market leadership.Measures a company’s market value and net worth.

Frequently Asked Questions (FAQs)

1. What is the available market size? 

It refers to the portion of the total market that a business can potentially serve or reach with its products or services. It represents the customers or segments within the broader market that are accessible and interested in the offerings, considering factors like geography, demographics, and buying behavior.

2. Why is market size important? 

It is crucial for businesses as it helps them assess the potential demand for their products or services. Understanding it helps in strategic decisions, including resource allocation, pricing strategies, and market entry. It also aids in identifying growth opportunities, attracting investors, and evaluating market competitiveness.

3. What are the 3 elements of market size? 

The three key elements are:
Total Addressable Market (TAM): This represents the entire potential market demand for a product or service, assuming no competitive or logistical limitations.
Target Market: This is a subset of the TAM, consisting of customers or segments that a business aims to reach based on specific criteria like demographics, geography, or behavior.
Market Share: It signifies the portion of the target market that a company captures with its offerings, indicating its relative position and competitiveness within the chosen market segment.

This article has been a guide to what is Market size. We explain its formula, calculation, example, how to estimate it, & comparison with market share & market cap. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *