Market Size: Definition & Explanation

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  • 0:00 Market Size Defined
  • 0:22 Estimating Market Size
  • 1:33 Reviewing the Opportunity
  • 2:46 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

In this lesson, we will define market size and explain how the term is used. Learn how to estimate market size and how this can be used to identify potential business opportunities.

Market Size Defined

Have you heard the phrases 'the market for this is' or 'the market for that is' and wondered the meaning? Market size is a measurement of the total volume of a given market. For now, think of market size in terms of a pie chart (think of a circle). The entirety of the circle represents the market size.

Estimating Market Size

Let's say XYZ Company was contemplating expanding their operations. They make widgets currently but want to explore the possibility of making gizmos. The company needs to calculate the market size for gizmos prior to commencing production.

In an attempt to calculate market size, XYZ Company looked at sales by their competitors and also analyzed the end user - the consumer. XYZ Company calculated that the current market size of gizmos was $100 million in 2014 in the United States. By reviewing sales statistics from their competitors, they learned that ABC Company had 2013 sales of $40 million, and DEF Company had 2013 sales of $20 million.

Since the market size of gizmos is $100 million, and since XYZ Company learned that both ABC Company's and DEF Company's production lines were behind schedule (sales were backed up for months), XYZ Company may be making a wise decision in filling in the $40 million gap in market size. Each company's respective 'piece of the pie' in the market size is their market share.

Reviewing the Opportunity

Before beginning production, XYZ Company analyzed the market size graphic seen here:

Graphic for Example
graphic for example

The company predicted that the market size would be unchanged for 2014, and thus decided to enter production after having received results that if their plans were to succeed, the company would be profitable.

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