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Market size
estimation: end-user demand
Removes preconceptions about
the size of a market based on historic sales and focuses the mind
on the potential market for a product or service. Can be
difficult to make estimates when there is little experience of
the market.
Description
When operating in
known markets, there is a danger of considering the market size
as the 'installed base' of a product. This is not the same as the
true potential end user demand. When exploring new markets, it is
useful to take a 'top-down' approach to sizing the market and
evaluating the market trends. It is unlikely that there will be
accurate data to size any specific product or niche market and
the cost of making highly accurate estimates can be high.
However, it is likely that reasonable estimates can be made based
on available data.
The market for any product van be
viewed as a fraction of the overall target population. The trick
is to define the target population(s) and make dependable
estimations about the likelihood of individuals or groups within
that population purchasing the product. Taking a top down
approach, the target population can be established by a process
of narrowing down larger populations.
Understanding market segmentation
is central to making effective estimations of market size. Some
tips include:
Define the maximum possible
population
Define the population which encompasses the largest
proportion of the potential end users. For example - all
pensioners, women over 30, manufacturing companies etc.
This represents the largest possible target market in the
unlikely event that 100% of the population buys one
product. This will help the team to clearly define the
marker of interest.
Define the sub-populations
Within the overall population, are there sub-populations
of interest? For example, within the domain of
manufacturing companies, maybe only those of 250 people
or more are of interest. This may be further refined to
isolate specific sectors. Within each sub-population, it
is likely that only a small proportion will be
interested.
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If data is not available directly, are there any
analogous markets. For example, if you are selling
machine tools, is there a relationship with the market
for steel or usage of electricity. If you are selling
water filters, is there a relationship to water
consumption or maybe the sales of kettles. Are there any
associations between the purchase of one product or
another? For example, commercial vehicle production
statistics may be related to the demand for truck tyres.
Identify uncertainties
How confident are you in your assessments? Make sure
assumptions, extrapolations and uncertainties are made
clear.
Notes
- Effective estimation demands
good investigative skills and creativity on behalf of the
team.
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