How do you determine the size of your target market if such information is not directly available? Many aspiring business start-ups face this question as they develop their business plans. This article will show you how to determine size of your target market in the absence of direct market information using deductive reasoning and/or calculations.
In my previous post, I discussed the importance of establishing the size of your target for your business plan. Knowing the size of the target market helps you to:
1) Determine your potential revenues from that specific market;
2) Formulate your marketing strategy for that segment; and
3) Enable the potential investor(s) to gauge the size and scalability of the proposed venture.
In that post, I discussed a simple case where information needed to calculate the size of the market is directly provided. With the number of customers given and the amount they spend to purchase a given product/service is known then it is a straightforward matter to calculate the size of your target market as shown below:
Unfortunately, in many practical cases the numbers of customers and/or the amount they spent on your product/service may not be directly available.
Question – How then will you calculate the size of your target market through market research?
Answer – by deductive reasoning and/or deductive calculations.
This is best explained by using an example. Consider the following case study:
Jane lives in a country in East Africa and has a talent for making handcrafted items (especially hand-knit items such as woolen sweaters and blankets). Jane discovers that there are online market places where she can sell her items and she settles on Etsy. Jane wants to prepare a business plan to raise some money to develop her business. Among other specifics she must employ market research to determine the size of her target market. Some specific details concerning her chosen venture include:
Jane’s Business Model: The business will involve creating high quality hand-knit woolen items for children less than 5 years old and selling them through an online shop at Etsy. These will be shipped through a reliable post office service to the customer after an order is made.
Jane’s Target customer: female, aged 25-44 yrs, lives in North America, married or single, has at least 1 child who is not more than 5yrs old; has easy access to internet; earns at least $25,000/year
But during her market research, Jane quickly realizes that Etsy does not provide specific data on how many women buy hand-knit items or how much they spend on the same.
So the question is: How will Jane determine the size of her target market from market research with such little information?
Now to calculate the size of the target market, two things must be established:
1) The number of women who visit Etsy to buy hand-knit items for their children; and
2) How much they spend to buy these particular items
1. Calculation of the number of customers
Jane does some detailed arket research from various sources and summarizes her findings in Table 1:
From this, the number of people who fit the target criteria is established as follows:
Thus, there are 63,360 women who fit the desired target customer profile who visit Etsy each month and make actual purchases. But this is just the general number of women who visit the site to make purchases. Jane must somehow find a way of getting the proportion of these women that specifically purchase hand-knit items.
So Jane does some research in the US Census Bureau and finds that households in the United States spend about 10% of their income on clothing. On this basis, Jane makes an assumption that out of the total number of women who visit Etsy to purchase an item, 10% of these will buy clothing items. She further assumes that out of these 10%, 10% will buy hand-knit items (i.e. 10% of 10%). So the actual number of women who can be expected to buy hand-knit items will be:
2. Calculation of the total amount spent by customers in the target market
After further research at Etsy (using relevant search criteria), Jane finds that the average unit price of hand-knit items (relevant to her chosen category) is $50.
3. Establishing the desired market share
With the above figure, Jane can now go ahead and make a statement like “I intend to capture 20% of this market by the 5th year of operations”.
Additionally, she can prepare a graph using excel to show how she intends to build her market share over a 5 year period as follows: (Remember the saying: A picture speaks a thousand words)
Some important notes on calculating the size of the target market
1) Formulate justifiable assumptions. While it is not easy to predict what will happen in future this is definitely not an excuse to make wild guesses or assumptions in your business plan. It is a big mistake to assume that the investor/s will accept with blind faith whatever figures or assumptions that you throw at them. The investor expects that:
-you have done some rigorous market research to establish the size of your target market for your business plan; and that
-any assumptions made are rational and supported by plausible arguments.
It goes without saying that references to your sources of your information should handy just in case you are asked for verification. For instance, the figures obtained in Table 1 are denoted by numbers in superscript (2 to 7). These refer to sources of information that have been used to obtain each figure and can be listed below the Table or somewhere in your Appendix.
2) Demonstrate that you have thought through the process. Your assumptions may not be 100% accurate and your calculation framework may have some minor flaws. But this is not the point – the point here is that the potential investor wants to see that you have thought through the process (as we have done) and taken time to think and work out the numbers – this is what is important. As long as this is evident, then you still stand a good chance of securing funds for your venture.