Whatever your line of business, it's important to understand the size of your potential market. In fact market size is fundamental to whether or not you will be successful. Quite simply, if your potential market is too small to support the revenue you need, you are unlikely to succeed.
Let's take a look at an example of a retail business selling up-market household items in a UK south coast seaside town. The following is a real-life example of how someone researched the size of their potential market before deciding whether or not to set up the business.
She knew that trade would come from both local people and tourists visiting the area. A trip to the local tourist office gave some useful figures for visitor numbers to the area by week for the entire year. Immediately she could see the expected 'seasonality' of these visitors - with over 80% of the annual visitors arriving in the months of June, July and August. As well as seasonality, she also now had some actual figures for visitors - amounting to around 32,000 in a typical year. These figures were based on people staying within the local area.
On top of this she made some rough estimates of how many people visited the area for the day. (She did this by adding up the number of parking spaces in the town, and estimating that on a typical day half of these would be taken by 'day visitors'. The town had around 850 parking spaces, which on average were 50% utilized in a typical week. So 850 spaces x 50% utilization x 50% visitors from out of town = 212 people per day, or around 1,400 people per week. This multiplies up to around 73,000 visitors per year.
So, adding up these rough visitor numbers, she arrived at 105,000 visitors per year. Of course, many of these visits would in fact be made by the same person on several occasions - so she was aware that this was likely to be an over-estimate.
In addition to these visitor numbers, she was able to get hold of some population information from the local council. This revealed that within 20 miles of the location of her shop, there were around 47,000 people living. Again, some of these people would also be within the 'daily visitor' estimates that she had already made - so once again she was aware that this area also contained some over-estimation.
So, on the face of it, there is a potential market of around 152,000 people. Keep in mind that these figures are approximate - but that is not a problem, as this whole exercise is about feasibility. In order to reflect the double counting mentioned above, she then decided to reduce this overall visitor count by 30% - making and approximate potential market of 106,400. Remember also that this estimate contains significant 'seasonality' which will influence how the business is run at different times of the year.
The number of people visiting or living in the area is, however, not the only factor to consider. There is a second strand to this research, and it is concerned with how many people within that 106,400 will be interested in and / or able to buy the goods in her planned shop.
Market research organizations categories the population into different groupings based on a whole range of factors such as income, education, location, age, marital status, etc. In the UK, one such set of categorizations is maintained by NRS Ltd (The National Readership Survey). NRS social grade definitions are fairly broad, and are therefore useful for this type of approximate market size work.
A shop selling up-market household goods will not appeal to everyone. In fact, our business-woman decided after reading around the subject that she would target NRS social grades A, B and C1. These social grades contain around 55% of UK adults. So, her estimate of 106,400 potential customers can realistically be reduced by 45% to around 58,500. A further factor is likely to be the reluctance of some men to shop for household goods - making a further reduction a wise precaution. She decided to reduce the figure by a further 20% to reflect this.
So based on the assumptions we have outlined in this article, our potential business owner concluded that her approximate market size was 46,800.
Her next step was to have a stab at estimating the average value of a purchase in the shop in order to work out how many of this 46,800 she needed to make a purchase in order for the business to be viable - but that's the subject of another article in this series.
In conclusion, our business-woman did some good work to get an approximate idea of the number of potential customers in a year. Although the figures were approximate and contained a number of assumptions, they were very useful in helping her to decide whether or not to go ahead with the venture. This type of work is a valuable part of business planning, and helps give a solid foundation for any potential business.
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