How can it help your business? The response to these inquiries would be, the expansiveness of the market in terms of business potentiality, and what are those factors which drive it’s development. Calculating the Market Size gives you reasonable ideas about the market in terms of numeric digits. By getting those figures, it will help you decide your investment budget for that market segment. Additionally, it will help you and your investors to see the amount of asset required for this project and if the project can maintain for long run.
From my last article, I hope you understood how to identify your target market segment. If not please read – How to identify your market segment?
Let’s discuss how to Size the Market, there are two possible ways to size your market i.e.
- Top Down Approach
- Bottom Up Approach
Top Down Approach – Look at the Broad Market and move down to Target Market.
Bottom Up Approach – Look at the Single Sale and Calculate the Total Sales.
To calculate the market size, you need valid data points from any reliable source for that market and a couple of information focusing on the view of presumptions. You can get those data from any reputed statistical survey sites or you can Google it, moving to how to calculate the market size, to do that you need to understand the market demand and supply ratio.
Who are those customers in target market? The total cash spent by those customers to purchase that service or product, the number of units purchased in a year and the number of events these products are being used for.
Let’s talk about the Data Points that are required to calculate Market Size using the Top-down Approach.
Let’s Calculate the Market Size of Refrigerator with respect to Indian Market;
To calculate the Market Size of a Refrigerator, you need to consider the New Demand and Replacement Demands.
New Demand – It’s a fresh requirement for those who don’t have refrigerator at their homes or offices. It can be calculated as [Estimated Number of Refrigerators x Growth Rate]
Replacement Demand – Replacement of existing Refrigerators with new ones. It can be calculated as [Estimated Number of Refrigerators / Life Span of Refrigerator]
To calculate the total estimation of Refrigerators in India, we will consider the Top-down approach model. We will take the total population of India and use the top down approach model; we will be moving down to the total estimation of refrigerator in India.
India’s current population is around 1.3 Billion and approximately 30% are living in urban and 70% are living in rural areas. Taking that into consideration, we can reach 376 Million people living in urban areas and 877 Million people living in rural ones. Assuming that in urban areas the average family size would be 4 members and in rural areas would be 6 members. So the total families that are living in urban areas will approximately be 94 Million, while the rural areas will approximately be 146 Million.
The above figure tells you the segregation of people with their buying capacity of Refrigerator.
So Total Estimated Number of Refrigerator = 15.8 + 3.62 = 19.42 Million
Let’s say the average life span of a Refrigerator is 13 years; therefore the Estimate Replacement Demand of Refrigerator would be the Total Estimation of Number of Refrigerator/Average Life Span of Refrigerator i.e.
Replacement Demand of Refrigerator = 19.42 / 13 = 1.5 Million
Let’s put in consideration the 10% growth for Refrigerator each year, so the New Demand would be i.e.
New Demand of Refrigerator = 19.42 x 10% = 1.9 Million
So that the Total Estimated Refrigerator Demand each Year = 1.5 MN + 1.9 MN = 3.4 Million
Let’s assume average price of each Refrigerator is Rs. 15000
Therefore, the Total Market Size for New Refrigerator = Rs. 15,000 x 3.4 Million = 51 Billion
Now, you can understand why it’s very crucial for a startup to calculate the Market Size before jumping into it. Look at this figure, what do you think now, is it a good market to jump in? It’s the call you decide.
Thank you for your patience for spending valuable time of yours, hope you like this article.
On the second part of this article, I will be sharing how much money you can make from this market.
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