ESYB2 042 - Your Market Size Section of the Business Plan
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[00:00:00] Now let's begin discussing how to identify your target market and calculate your market size. These are especially helpful if you're going to seek investment or if you're just trying to understand what you can realistically expect from this business and how much money you want to put into it, things like that.

So the first mistake most first time entrepreneurs make is saying something like, My target market is everyone. Or if they know that They can't say that they try to get away with that by saying my target market is all men or all women or all younger or all older people or all teenagers or all some gigantic group, which is almost the same as saying everyone.

So some people kind of wise up. And the next level of improving that statement is something like everybody in their 20s and 30s with a job. So they mention a few demographics only, like the age or having a job, and we'll talk about demographics in a second. It's still not quite enough. And [00:01:00] the real issue is that, of course, you will sell to everyone, which is what you mean by my target is everyone.

Yeah, you, everyone is welcome to become a customer, yeah, sure. But some people, some group, is extra, extra ideal to sell to. That is exactly your target market. You have to identify exactly who they are, so that you can structure your business around it, and especially structure your marketing around it, so you can reach them.

And In this video, what's also going to be important is you're going to understand what that market size is. Not the overall market, but that market that's the people that will love your product or easy to sell to. So now let's talk about counting the size of the market. Usually it's counted in currency.

So like we can say US dollar currency. So 1 billion market, 10 billion market. I'm sure you've heard terms like this thrown around. [00:02:00] And let's go over the first term definition that we need to understand, and it's TAM, Total Addressable Market. It's the overall revenue opportunity. For example, if I tell you that the automotive market is 100 billion in the U.

S., then that's TAM. That's the overall market. Of course, no single company reaches that because that's the overall market. That's all the revenue possible. But that's the starting point. And if you want to find the TAM in your industry, maybe it's health and wellness, maybe it's beauty, maybe it's some other gigantic industry, you just have to Google for whatever your industry is.

In this case, I gave you the example of auto market size research or beauty and wellness research or something else, skincare market research. And you'll find industry research for the past years and you'll get a lot of data for it. The issue is that It's useful, but only to a point, because for example, [00:03:00] if you're a local business, it's not that useful.

For example, if you have a cleaning business or a roofing business, what use is it knowing what the overall market size for this is, if you can't address that, because you're only able to do that for a certain local area. And if you have a niche business like I give the examples of with the mobile apps, well, it's also hard to know like.

What exactly is the total addressable market, even though we might have a total overall market for it. And we'll talk about how to calculate that in a second. So first, let's talk about understanding your consumer. And you do this through two things. They're called demographics and psychographics. And no, it doesn't mean that your customers are psychos and crazy.

It means something else. So demographics are things you can Objectively measure age, sex, marital status, their income, their education, where they live, location, where they work, things that are measurable and [00:04:00] objective. And this is something you can research. This is something you can know concretely. But it's not enough.

Because you have to understand the psychographics too. These are things that are not easy to measure or sometimes impossible to measure like interest, hopes, fears, insecurities, passions. I mean, how do you measure hopes? It's not possible. But these really help to understand your consumers and what goes on in their mind.

For example, if you're selling some high end clothing, you probably should understand what goes in the mind of a consumer when they buy that high end clothing. Are they trying to look cool? Are they fearful or worried that they won't fit into a certain group? What is the buying motivator? You gotta get into their mind, and there's no better way to get into their mind other than talking to them as much as possible.

You got to talk to people who you think are your target market. And [00:05:00] sometimes it helps if you are also within your target market, because then you really understand the consumer, but it's not necessary. For example, if you make clothing that you'd also wear, or you make music that you'd also listen to, then you know the taste of that consumer and you know why they consume versus not.

But talking to potential customers is a fantastic thing you should always be doing. And you need to get to know them better than they know themselves. And I know it sounds funny, but if you Look at my business for example, like I do business coaching and when people come to me and they're first time entrepreneurs I've spoken to over a thousand such people already the new entrepreneurs don't know what their journey will be like But I really know what their journey will be like so it's not that outlandish to Assume that you know more about them than they do maybe not in everything in their life But certainly in in the topic of that business or product And you can also get to know [00:06:00] your customers when you begin doing your early sales or early marketing.

Of course, you're going to be getting that answer from them. Are they buying? Are they not buying? And of course, you should come into the business with some industry expertise so that you know your customers. So what's going to happen is when you identify the demographics and psychographics of your customers, you're going to be able to differentiate in market segments.

So you have your overall market. And then you're only able to target a market segment who are people whose demographics and psychographics fit your product or service, you see, once you have that, you can actually begin calculating your target market correctly. So let's talk about how to do that. There are three ways.

The first one is the top down approach where let's say you have an example, the roofing market is. 30 billion dollars in the U. S. You can only do roofing in the one city where you live, because this [00:07:00] is a traditionally called a local business, right? You probably will only travel 30 miles radius out. So, you have to calculate what percentage is that city, the percentage of the U.

S. overall market. And then you have your market. But that's only demographics, right? That's only the number you can calculate. But what about the people who procrastinate on their roofs or homes that go intended to, or people who don't do the roofing for a multitude of other reasons, identify them, subtract them, then you have your actual addressable market and you know what your market will be.

Another example is clothing for teens who love music. You take the whole market of clothing for teens, and then you basically see, okay, how many of them like that certain music, how many of them dress in that, and then once you've narrowed that down, then you have your Addressable market. So you go from the top with everybody and then you narrow it down and you get your market.

Now let's talk about two other approaches. The bottom up [00:08:00] approach and value theory. They are related. The bottom up approach is basically understanding what you're selling, how much you're selling it, and multiply that by their value. It's realistic to dominate, like, let's say, some certain segment. There's a certain number of people in that segment.

We know what their value is. And That multiplication is essentially your target market, addressable target market. The value theory basically sits on top of that. So an example of value theory is if you think that you can upsell more products and services from existing consumers. So for example, if current existing consumers are like valued at a hundred dollars a year, but you think you can upsell more or you.

Offer more value than that. A hundred dollars a year is worth, and you're gonna be able to charge for more things, offer more services, and maybe make $150 from each consumer on average. Then of course, you add that [00:09:00] because you've actually expanded the value of the market with expanding the value, and this can happen by introducing multiple product lines or introducing.

Better products or just upselling more things, essentially getting customers to pay more. So these are the ways to first identify who your ideal customer is. And from that accurately calculate your addressable target market.

