Before embarking down the road to build a mobile app, it’s useful to first run a market sizing test to determine if your investment in time and money will be worth the effort.
For example, as a simple thought exercise – what if you wanted to build a mobile app to help people in Chicago find artisanal craft beers. Given that Chicago has a population of about 2.7 million. Perhaps 2% of them are craft beer enthusiasts, which means an addressable target market of 54,000 people. If 21.5% of them have Iphones and 4% at a maximum are willing to buy your app, that’s only 464 customers. If you price the app at $0.99, you likely won’t get a return on your investment from serving these 464 customers.
Generally speaking there are two approaches to market sizing: Top-down market sizing and Bottoms up market sizing. This post is going to explain the basics behind top-down market sizing.
Top-Down Market Sizing
Step 1: Get an estimate of your total market size. Use reputable research companies such as marketresearch.com, Forrester, Pew etc. It’s useful to also review industry associations or business publications if you’re targeting a niche field. In this step you’re trying to estimate the maximum potential for your product. As shown above, it could start with the total population of Chicago or be a statement such as:
“The US beer, wine and spirits distributions industry includes 4000 companies with combined annual revenue of about $100 billion.”
— First Research, Inc., March 2012
Step 2: Segment the market. Define a group of potential customers who can use your solution or suffer from the problem and share several characteristics. I wrote another article about market segmentation criteria, but common factors to consider are: geographic, standard industrial classifications, demographics, purchase/usage groups. Or even custom characteristics such as product attribute preferences, purchase patterns, price sensitivity, lifestyles, and dealer loyalty.
Step 3: Find your addressable target market by multiplying the total market size by your segmentation criteria. As my initial example elucidated, a mobile app to serve craft beer fanatics needs customers that share the following attributes: they love craft beer, are iphone users, and have a willingness to spend money on apps.
Top-down market sizing is the least accurate method when performing market sizing, but it does serve several useful purposes. It’s quick and relatively easy. It’s also useful as a gut-check to understand if this project is more hobby than business. Lastly it forces you to think about identifying customers and a path to positive cash flow.