Before embarking on an entrepreneurial journey, it is important to consider various aspects of business and its relevance and implications before investing funds into the business. A business plan typically contains all the aspects that need to be thought through before venturing into the business. One of the critical elements is understanding the market size of the product or service that an entrepreneur is set to launch. Market Size is the starting point to determine other parameters such as revenue assumptions, capital investments required to achieve the revenues estimated, resource requirements and cash flows required to start, maintain and operate the business effectively.
Arriving at the appropriate market size is dependent on many factors. The geographical area to begin with, the consumers profile, existing competitors, gap assessment and how likely the new entrant in the market is likely to have the acceptability and is able to fulfil the needs of the consumers. Market sizing is an outcome of carefully researched market study and the other economic and statistical data inferences.
As a general practice, market research can be done in two ways – one is the Primary Research which effectively means reaching out to the target group of customers, suppliers and other stakeholders who are directly going to have an impact on the purchase or consumption decisions of the product or service under research. This is a very effective way of understanding the market pulse. However, this is a very expensive and time-consuming process, and in many cases not affordable to many start up investors.
Further, in some cases, though investors would be willing to invest in the primary research, it may not be possible to get the accurate or the right data , particularly so, if it involves questions around procurement pricing, on shelf consumption, movement of particular goods in stores, gross margins and net margins , total sales volume and value etc., These are confidential information and irrespective of what kind of research one conducts, the research subjects are not likely to reveal. So before investing in a research it is important to understand how much of such information can actually be available and if available, can that be cross verified with any other source, since the only way to verify this information collected through primary source is to cross verify with the organization – which is highly improbable that they may share it or confirm the same.
Online surveys are another way to conduct the primary research. While this is definitely cost-effective than in person research, this drawback of this type is understanding if it has reached the right target group and is based on the premise that the target group reached out is actually responding to the surveys. This is however, one way where we can have verifiable data to support any inferences that we can arrive at to understand the market insights.
The most common method adopted to get the data about the market is to research through secondary market sources. These typically include published data of authentic agencies, government departments, established research agencies etc., Secondary research can also be drawn from information available on the internet. However, abundant caution needs to be exercised before using the information since everything found on the internet may not factual.
While some published data is available for free if you’re looking for in-depth market statistics, they are available for sale through various sites, these are usually compiled and forecast information from global perspective and give the market insights from a global standpoint. These reports are usually on subscription basis or outright purchase basis and tend to be very expensive. There are also some reports which are tailor-made for some specific geographical areas. In countries where corporate information and other business information is legally published, it becomes easier to get such information, however, in the majority of the middle eastern countries and developing countries not all information is published, so the data that is published is based on certain assumptions and disclaimers as well. Therefore, it is important to understand where from and how the data has been sourced to arrive at conclusions.
With data being compiled from either Primary sources or Secondary Sources, market insights can be drawn. Typically, the terms Total Addressable Market, Serviceable Market etc., are used to define the market size of the particular product or service.
As an investor, while these are really important, the relevancy of the information and how can one adopt the same for the business, remains a question. Various factors that need to be considered while arriving at the market size are based on market research, which include the following:
- Similar products / services available in the market
- Pricing of such products or services
- Quantitative availability and Consumption analysis
- Competitors Analysis
- SWOT analysis before investment
- CAGR forecast
- Need Assessment Vs Demand Assessment
- Marketing efforts that would go into creating a need or fulfilling a demand.
While all details are not readily available–it is important that based on the research–we can compile some relevant data, it is highly unlikely that we will get accurate data to base our investment decisions on. It’s here that a critical and often an unattached element can be used to arrive at the potential market size. This is called Inference Analysis.
While there is abundant data available–unless one is able to connect the data and make a meaningful inference from it, the data will seem irrelevant. Therefore, making an inference analysis is one very critical aspect to understanding the market size for the products or services under research. Inference Analysis are based on certain factual data available combined with the statistical assumptions based on the nearest possible consumer or the target group behavior and on this analysis is used to draw the market size assumptions which can be relied upon before making any investment decisions. While this is not a foolproof method to arrive at the market sizing, it is however, a reliable method as this is based on factual data and closest criteria that you can infer from the data compiled from secondary sources and both these are verifiable. The only element which is dependent on other factors is a probability-based assumption.
To conclude, while every investor is keen to know whether they will be able to sell the products or services, it is important to understand the kind of market size available for an investor to capture and this will be the determining factor to plan all the investments, resources, and build strategies around by capturing and documenting all these in a well thought through business plan.
If you have any queries with market research or business formation you can book a free call with our Jupiter Business Mentors at https://jupiterbusinessmentors.com/
