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Estimating Your Market Size (Business-To-Business)
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 an IT hardware and software supplier located in London that is considering opening an office in Birmingham. The company supplies software for accounting, CRM, and manufacturing - and it also supplies hardware such as PCs, servers, and network equipment. It has historically made most of its sales to companies in the 'small to medium' size bracket.
Before opening the new office the company needs to understand the potential market size so that it can plan the overheads of the new operation.
The company began by considering carefully what 'small to medium' businesses meant in numerical terms. Company size is typically measured in terms of either turnover, or number of employees. They decided that they would target companies with between 25 and 200 employees. They had previously sold to companies both above and below this size band, but these were relatively few and far-between. Their product development activity was not specifically aimed at selling bigger, more complex software packages to larger companies - so it had little bearing on the decision of the size of company to target.
A search of the National Statistics Office web site revealed some very useful information regarding company sizes. Across the UK, there were around 100,000 companies in this size bracket. The information was also available by county, so the company was able to remove potential customers in those areas that were either already covered by its London office, or just too far-flung to be worth targeting. After removing these, they arrived at a figure of 35,000 potential customers in the target area for the new Birmingham office.
The next step was to list out a series of 20 or so market sectors and to decide whether or not each one would be a target. This decision was based on the sectors that they had sold to from their London operation, plus what they knew about their software development programme, which was intended to open up some new markets for the company. In summary they excluded not-for-profit organisations, government, and financial services companies from the overall list, and included manufacturing companies even though they had not historically sold much into this sector. This was based on their current product development plans to better serve the manufacturing market.
Based on the above, a further consultation with the National Statistics Office web site enabled them to make a reduction of 3,000 companies from their initial estimate of 35,000 - leaving an approximate potential market of 32,000 companies for the new office to aim for.
Based on some further work concerning average order size, the company was then able to determine how many new customers it needed to gain in order to reach break-even for the new office. This is the subject of a separate article in this series.
So, in conclusion, the company was able to approach its business planning in a logical way to determine roughly the size of the market for its proposed new office. This gave a solid basis on which to base further decisions.
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