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One of the first tasks an entrepreneur needs to accomplish when they take on a new venture is to calculate the market size and the potential revenue their startup could generate or the estimated market demand for their product or service. Your business idea might be the best in the world, but unless you know who your customers are, where they’re located and how you’re going to reach them, you’ll never be able to build a business plan that helps you reach your goals.

But what exactly does “market size” mean and how do you define it?

In simple terms, your “market size” is the maximum amount of revenue your business could make if you were able to capture the business of every person in your market.

Knowing your market size is critical, no matter what industry you’re in or what product or service you’re selling so you can plan elements like staffing, inventory, and growth potential. For example, if you’re a small bakery, knowing how many cakes you expect to sell a year is critical so you can buy the proper amount of ingredients and pay your rent on time. Similarly, if you’re a tech entrepreneur, knowing how many software sales you expect to make a year is important so you know how many sales people you need to employ, how quickly you’ll need to develop your product and other important business factors.

In this post, we’ll teach you what “market size” means, why it’s critical to know before you dive into building your business, and how to calculate it.

Why knowing your market size is important

Your market size and potential business revenue are critical to know up front because without this information, you can’t create an effective business plan and you and your business partners really can’t accurately tell how much potential business is available – meaning your business might not even be viable.

In addition, without knowing your market size, it’s impossible to seriously approach potential investors without looking silly. If securing outside funding is a part of your plan, every angel investor and venture capital firm will be looking for this number right out of the gate – be sure that you have a grasp on your market size before even beginning those conversations.

Even with a solid grasp on your market size, it’s unlikely that you’ll be able to capture every lead within your market unless you’re a monopoly or the only player in your space. Even if you were, there are still going to be people in your market that are going to be impossible to convert, so it’s important to be realistic about this number and how it pertains to your actual forecasted revenue.

Because of the above reasons, it’s crucial for you to understand the amount of potential revenue your business could realistically produce. This number of potential revenue is referred to as your “market size” and helps you and everyone you partner with understand your startup’s growth potential.

How to calculate the market size

To determine your market size, you’ll be looking for the number of potential customers who would be benefited by your product or service or the number of transactions you could do a year, depending on your product. For example, if your business sells an innovative type of sunscreen, virtually every person on earth could benefit by using your product, if they’re following recommended sunscreen use guidelines. If they buy more than one bottle of sunscreen each year, that number will be even larger. On the flip side, if your business sells computer software to businesses in the manufacturing industry, your market size is going to look a lot smaller. Understanding how your industry plays into your market size is critical for using this number effectively in your business plan.

How to calculate the market value

Knowing your market size, or the number of customers you plan to serve, is important, but knowing how much each of those customers is worth is very different and equally, if not more important than knowing your market size.

In order to make smart business decisions, you need to know how much you can realistically earn from each of your customers. In our above example, a business that makes toothpaste has a much bigger market size, but a vastly smaller anticipated revenue-per-customer than a business that makes computer software for manufacturers, which might have a smaller market size but a very large market value.

To calculate your market size, you’ll need to calculate the number of potential customers your business could serve and multiply that number by your expected annual revenue from each of those customers in your market.

Steps for calculating your market share

Before you can jump into figuring out the numbers, however, you need to know exactly who are the customers you plan to serve. For a large company like Apple, their market size or market share could include nearly every person on earth, but even companies of that size need to know their target market in order to market their product effectively. And for small businesses like yourself, this is even more important.

Here are three steps you should complete as you begin to define who your customers are:

  1. Define your ideal customer – The first question you should consider when defining your market share is who your customers actually are. If you’re an innovative toothpaste startup, your customers could potentially be anyone on earth who brushes their teeth, but how many of those people would actually be interested in your product? Zoom into your customer by creating a profile of the ideal buyer. If your company advertises toothpaste specifically designed for each mouth’s unique needs delivered monthly to your customer’s door, think about what type of person would be interested in that service. In this case, likely young, millennial professionals who are already used to having things delivered on schedule with the tap of their finger and who are less likely to go to the store to buy things like toothpaste. Once you know who your ideal customers are, you can much more easily define how large of a market share you actually have.
  2. Decide where your customers are – A second step to calculating the size of your market is figuring out where your ideal customer is located, because that will make a big difference in who you’re actually marketing your product to. If your toothpaste startup relies on same-day delivery or subscription boxes, your ideal customers will likely be big city-dwellers who use services like Doordash and Uber and for whom ordering on mobile is second nature. Once you know this, you’re not going to waste your time marketing your services to older people who live in rural communities in the Midwest, for example.
  3. Calculate the number of sales in your market – The last step to accurately determining market share is figuring out how many sales of products or services like yours occur in your market. For example, if you’re selling specialty toothpaste to millennials, you likely wouldn’t base your market share on the entire number of tubes of toothpaste sold in major cities, you’d probably narrow that down to tubes to toothpaste sold to members of your target demographic based on where those customers buy. Knowing how many sales you actually plan to make within your target demographic is a key part of calculating potential revenue for your business, which influences countless other factors of growing your business, from how quickly you can hire employees, to how many units you need to sell a year in order to stay afloat.

With ideal customer, geographic location, and the average number of sales within those parameters in mind, you can now begin to accurately define the size of your market and building out other areas of your business plan.

How to begin building your perfect business plan

Now that you understand how to define your ideal customer, figure out where those customers are, and how many sales you expect to make within those demographics, you’re ready to calculate your market share and get to work building your business. Armed with this information, you’ll be prepared to go into meetings with angel investors and potential business partners feeling confident that your business idea is viable and that you’ll be able to reach your target market and actually make money from your business venture. The next step? Market domination.

But before you start polishing your Thirty Under 30 speech, you’ll need a marketing plan designed to help you reach your ideal customer. That’s where we come in. Big Leap Marketing helps small businesses just like yours define their target market and reach them through a variety of time-tested strategies. We’re experts in the field of small business marketing, and we can’t wait to partner with you to help you dominate your market share. Sign up for your free Big Leap consultation to learn how we can help you rocket your small business from the basement to the boardroom.]]>

Meg Monk
Meg Monk is a freelance writer and content strategist based in Salt Lake City. When she's not writing about marketing strategy, she's camping in Utah's mountains in her 1976 Airstream or planning her next international trip - 29 countries and counting! You can find more of her work at megmonk.com.