Introduction
If you are setting up a business, you need to find out the size of your market.
What is the total value of your market in pounds? In many cases, the value has already been calculated by others and is freely available.
However, the danger is that you can never be sure how much market share you can win. Statements such as “If only five per cent of the market buys my product then...” are little better than daydreams that will be treated sceptically by lenders and investors.
It is possible, of course, to create a market. Few people in the UK wanted to buy bottled water until it was promoted as part of a healthy and desirable lifestyle in the 1980s. This market is still growing.
Knowing that the total market size of 'recreation and culture' spending in the UK domestic market is £88 million a year doesn’t necessarily help you. Firstly, these numbers are estimates. Secondly, they are the amounts other businesses generate. You have to start at zero and:
Finally, complete your own statistical analysis, for example, by asking 20 potential customers if they would buy what you are offering and how much they would pay. Such information can be compared against third-party data you are using.
Identify your customer profile
Before you can determine your market size, decide which part of the market ('segment') you intend to focus on. If you think the whole of the UK is your market, this is easy – it is about 60 million people.
Of course, this is never the case (unless you have the monopoly on air). As a small business, it is better to focus on small segments of the market that offer the greatest returns.
For example, many people in the country might buy bottled water, but you are probably best targeting those who buy the most (eg high-earning professional women who belong to a gym).
Who is your target customer?
Describe your target customer:
Expert tip
You can base the above profile on potential customers identified through your market research or on the type of customers who buy from your competitors.
Keep this person (or business) in mind as you move through the rest of this workshop. If you have multiple targets, then you should determine the market size for each of these independently.
Determining market size
Once you have identified your target market, you need to know how many potential customers it contains.
National Statistics (www.statistics.gov.uk) is a good place to start for numbers of people in a specific market and how much the market is currently worth.
A useful site for statistical and demographic information is www.marketresearch.org.uk.
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Search libraries
Some larger public libraries are good sources of statistics. Find your nearest library on the UK Public Libraries website (dspace.dial.pipex.com)
University departments and libraries sometimes have data they can provide free of charge (or at a low cost).
Visit www.cim.co.uk to search a database of universities and colleges accredited by the Chartered Institute of Marketing.
Expert tip
Consider contacting relevant university departments to see if students would be interested in researching your market as part of their course work.
The British Library (www.bl.uk) also has a wealth of information available to business owners.
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Other sources
Trade or professional associations often collect data that can provide good insight to members. To find an association relevant to your business, visit a searchable database at www.taforum.org.
What information do you need to find out?
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Purchasing data and reports
You can also purchase market data or (if you’ve got enough money) commission firms to provide a market report. For example, you can:
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Directories
If you plan to sell to other businesses, directories provide a wealth of useful information about potential customers. Most leading directories are now online, which makes searching even more quick and easy.
Once you have their details, you can telephone or e-mail prospective customers to gauge demand for your products or services.
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Future trends and potential
While doing your research, look for evidence of future trends that might reveal where your industry is in terms of its 'market cycle'.
Where would you place your industry in the market cycle?
What facts justify this positioning?
Expert tip
Research all possible threats to your industry (eg new technology) that could render it obsolete. It is important to include this research in your business plan.
Pitfalls of statistics
Once you know the size of your target market, you can try to estimate how many customers you are likely to get. For example, if you are thinking about setting up a café in Sedgefield and you want to target married mums who want coffee after dropping the kids off at school, National Statistics data will tell you there are 63,312 people in the area.
A little bit more digging will reveal that 6.48 per cent look after a family/home. This equals 4,102 people. If every day they each have one cup of coffee at £2, the total market is worth £8,204 pounds per day.
If there are nine coffee shops and you plan to open the tenth, could you expect to secure 10 per cent of total coffee sales (£820) each day? During the course of a year, this would be about £300,000 pounds in revenue. It might sound great, but it’s unlikely, of course.
Potential versus reality
More often than not, market potential and real life are two quite different things. In the previous example, the statistics are likely to include many men who drop their kids off at school. Even among the area’s mums, there will be some that don’t like coffee. Others won’t want to drink it every day. Some just won’t have the time to stop for a coffee. And what happens during the school holidays?
Relying on statistics alone is dangerous.
The purpose of your research so far has been to determine whether there are enough potential customers to make your idea for a business viable. This will give some substance to your business plan.
But now comes the harder part. You have to explain to yourself and others how you will gain sufficient market share to make your business viable.
If you plan to sell similar products or services to existing businesses, why will people switch to buying from you? What sets you apart from the competition – what makes you special?
What is your unique selling proposition?
Why will customers buy from you and not your competitors?
Expert tip
Faster, nearer, friendlier… Whatever it is, you need to have something that makes you better than the competition, but don’t make the mistake of competing purely on price – you’ll struggle to make money.
New products
If you have a new product or service, a similar process applies. Remember that 'if only' estimates (such as "If only five per cent of the market buys from my business…") are at best guesses and at worst daydreams. You need to back up statistics with harder evidence. For example by:
Another way to gain evidence is to ask a representative sample of your target market three key questions:
1)
"Do you like what I'm offering?"
2)
"Would you buy it?" (people may like your product, but not wish to buy it)
3)
"How much would you pay for it?"
Detail hard evidence you have gained which supports your market estimate
Estimating what customers will pay
Right, let's suppose you now have a good idea of your market size. The next question is how much will people pay for what you plan to offer?
Knowing what other businesses charge for their products or services is a good place to start. Consider a competitor pricing exercise.
Do you know?
•
The price your local competitors charge?
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The price competitors charge in other parts of the country?
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What a potential customer will pay?
Average statistics can be a bit misleading - especially if the data is spread across your market, but it's important to have at least some idea. In the previous café example, the average amount spent on coffee might be £2, but what about the loyal customer that comes in every day? They might spend £20 a week (including the odd muffin) which is almost ten-times the average.
Template
Competitor pricing research
Use this template to record your competitor pricing research.
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How much do you think people will pay for your products or services?
I estimate that people will pay:
Expert tip
Now research the market to compare findings with your previous thoughts on your prices.
To conclude
Do as much research as you can to help you gain a surer sense of your market. With so much information available, you should be able to identify market potential in your particular industry.
The less your business relies on guesswork, the better. The information that will result from working through this module will form part of your business plan. It is likely to be viewed sceptically by lenders and investors, but you should be the most sceptical of all. After all – it is your money that’s at risk!
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Market Size template
When you have determined the potential market size for your product or service, use this calculator to conduct a quick estimate of its actual size.