Startup: How to Estimate A New Market Share

How to evaluate the app potential for a new market

Diving into details: definitions

It’s a great idea to incorporate a separate budget for R&D into your business plan. However, if this isn’t possible, you still need to find a relatively cheap way to evaluate the market volume. Even when all you can do is to implement a DIY approach. Here I’ll share what can be done.

Before getting to the point, let’s check some definitions. This will help make the logic of the market volume calculation more transparent. Later on, I’ll illustrate how market volume can be calculated for one particular project and how to evaluate your share of the pie.

• General population – anyone and everyone who can potentially use the product or service.
• Total available market / potential market – people who may be interested in buying your goods or requesting your services.
• Available market – all the customers who not only want your service/product but can also afford it.

Qualified available market – those who are allowed to use the products or services you offer. For example, for UK alcohol sellers, the qualified available market would be limited to buyers aged 18 and over.

• Penetrated market – a group of people who’ve already purchased the product/service. Usually, this is a group of loyal buyers.
• Target market or potential market – the segment of the qualified available market on which the company focuses on, i.e. the opposite of the penetrated market.
• SAM (Serviceable/Served Available Market). To calculate it, sum up all the potential customers and multiply that number by their average annual revenue.

Some examples, how the initial market volume estimation can be done

• Check all available open-source data. 

The quickest, cheapest and most precise way to estimate the market is to collect the evaluations that have already done by professional marketers. (Buying a report about your segment can be a good start to save you time and avoid building your forecast on the wrong data).

• Even public industry statistics for several previous years can be useful. 
  

The market volume can be easily calculated with a reasonable degree of accuracy if you know the industry figures and its general trends (increase or stagnation). You can estimate your market volume by approximating these figures and estimating the percentage your particular market can hold.

Innovative market evaluation 

If you’re coping with a new product or competing on an extraordinary local market, there can be no chance to estimate the market volume based on open-source data.

There are two options here:

• to implement independent market research collecting data from potential users/buyers (field-research);
• to do rough market volume estimation (desk study).

Field research vs Desk study: pros and cons

Field research will give you real data, and a better understanding of your customer needs if implemented professionally. 

Practically, it’s a very complicated, time-consuming and costly method, where respondents must be collected based on the particular probability deviation. A typical error is to base the strategy on the opinions of several friends or neighbours. Properly managed research will serve as a strong foundation for future business planning.

If you need some guidance on the field research preparation, check it here. 

Rough market volume estimation

Do IT Yourself: A rough estimation will not provide you with real buyers’ feedback or the exact figures. However, it can help you to evaluate the market volume. This can be done quickly and doesn’t require anyone’s help. Your data will lack real users’ opinions but can solve the main issue – calculating the volume.

DIY: How to implement rough market estimation

Look at this example: when you need to estimate how many piano tuners you need to hire to cover all the pianos in the town, you need to count all the pianos and divide this number by the average breakage rate per year. So, spreading the result across monthly periods, you’ll see how many orders there are on the market. This is precisely what we’re looking for: the monthly market volume. This method has a strong mathematical background and works perfectly well for a rough estimation.

Moreover, now we’ll now implement this logic to our project

Let’s think about localisation. Are you working for a nearby city or ready to cover the whole country? If you do a global market estimation, concentrate on the population of the main cities. Later on, you’ll add the correction index, which describes the deviation of city and country dwellers to cover everyone.

Now we’ll count all the figures for the above definitions for our hypothetical project.

Our case is the creation of a web platform where people can exchange their ebooks.

For this particular case, I will set our target audience as Londoners.

So, the general population of London is 8,787,892 people (based on official statistics).

To calculate the total available market, we need to deduct those who cannot read or use ebooks yet – let’s take children for the sake of simplicity.

Our next statistical source, https://www.trustforlondon.org.uk/data/londons-population-age/, provides us with the figures that 7% of the inner London population are children aged 0-4 and another 6% are children aged 5-9.

• So, the total available market for our project is: 8,787,892*(100-7%-6%)=7,645,466
• Available market – it’s time to calculate the audience that is ready to pay to use this platform. Here we come to the first presumption. Based on our intuition we have to decide: how many people are ready to buy this service?
  

Our case: the platform is not expensive, and anyone can afford to join it for a small fee. I suggest setting the assumption at 50%, meaning that only half of the entire group will have the desire to use the platform and be ready to pay. So, we have to deduct ½ of the above-mentioned amount. The figure now stands at 3,822,733.

• Qualified available market - despite the fact that any teenager can technically download a book, let’s imagine we set the age limitation for our platform to 20+ so we don’t need to control what kind of content is downloaded by adolescents. Our qualified available market has now decreased by an additional 10%. Result: 3,822,733-382,273=3,440,460.

• Penetrated market - you have no customers yet. Your penetrated market is 0.
• Alternatively, in your case, if you’ve already attracted some loyal visitors, it can be equal to the number of paying customers.
• Target market or potential market – now I need to deduct the penetrated market data from the qualified available market: 3,440,460–0=3,440,460
• So, the target market for our project is 3,440 M Londoners.

For our book-exchange platform, we plan to set a fee of 1,99 GBP per year. And Served Available Market will be 3,440,460 *1.99=6,846,514 GBP. Let’s set our goal for the first year to attract 5% of the target market: 172,023 people. Also, accordingly, the market value is calculated as 342,326 GBP. The alternative definition for this percentage is the market share by value.

• If you focus on the total quantity of the downloaded apps and compare them to the total downloaded apps, you’ll get your app share on the global app market. Marketers call this the global app market share by volume.
  

If you count the same figures for the particular market, as we’ve been calculating from the beginning, this will be your local market share by volume.

*Why should I set my goal as 5%, not 1% or 50%?
- This is the critical point, where we have to guess. The main business issue is to set realistic goals.

• You cannot set your market share goal without conducting competitor analysis. Check how your competitors work. Analyse their market share and plan of action. Think about an increase in competition with more players on the same field. Roughly estimate all the investments needed to repeat the average marketing efforts and can you implement the same.
• If you provide an innovative solution, your project will compete with the existing ways of doing things. So, an excellent realistic target will be to achieve the same results as the median (middle line) of the existing market players’ achievements. Next year you can plan to outstrip the market leader.**
• **Don’t forget that on each of the markets you’ll deal with both innovators and conservators. So if your target group is young people, innovators can be the majority of the audience, but if you’re dealing with the elderly, you’ll have to decrease the forecast of potential consumers even more than average figures.

Now you’re ready to set a clever percentage of the market share which you can achieve. And again, even on an absolutely new market, you can find some similarities with your approach. Analyse non-direct competitors, but focus on market pioneers to plan your efforts and evaluate the prospects.

Some tricks to take into account while implementing a rough market volume estimation: 

• For some services/products, family rather than individual usage should be assumed. In this case, the general population is the number of families.
• Some of the products/services have strong substitutes, e.g. a winter hat competes with a hood
• If you have such a substitute, decrease your market twofold, as half of your potential buyers will choose the available alternative. If you’ve identified several substitutes, reduce the market three or fourfold. It’s vital not to overestimate the potential volume.

In our case, such competitors can be stores selling e-books. Instead of exchanging the ebooks, your target user can buy a new one. So, it’s vital not to overestimate your market potential.

It’s relatively easy to evaluate figures on your local market. However, calculating the global market figures in the same way is tougher because the approximation of the rough data to large volumes leads to more significant statistical discrepancies.

To implement the global market estimation, I personally recommend inviting R&D firms or an independent marketing agency.

Tips for market share estimation 

The next step after the estimation of the current market volume should be the forecasting of future periods. To understand the potential for your company’s growth, it’s vital to see the general market trends: increase, stability or stagnation.

1. The rising market gives an excellent perspective for your company’s growth. If your startup sales rate grows at pace with the market, your market share remains static. Great potential and extensive possibilities for your startup.
2. If your share growth exceeds the global rate of expansion, then you’re growing quicker, so the market and each new landmark demand more efforts.
3. If your share is growing on a stagnating market (a decreasing one), you’re becoming close to a monopoly and close to the physical limit. It’s time to think about portfolio diversification.

When you should avoid increasing your market share 

It’s hard to believe, but in some cases, business “stagnation” is actually better than growth. Here are the most common reasons why:

• Official legislation that targets market monopolies. 
• Significant tax rate increases for those companies that have achieved some threshold based on a legal regiment or directive.
• Disproportionate growth of costs for business maintenance.

To summarise: 

Quite often, in order to understand the market situation, you do not need the exact figures. Even if it’s something totally innovative, the calculation of the market share and volume can be done via table research.

So, begin with the market volume, set a realistic goal to cover the market share and calculate the ROI for your startup. Jump to the next article for ROI calculation guidelines.

At Magora, we have an expert team to implement initial analysis before taking any blind steps towards software development. The discovery phase is a stable basis for further planning. Do not hesitate to contact the Magora team to discuss your project in detail.

Kirill Khrestianovskii

October 10, 2019