Welcome to Module 4 which will cover everything you need to know about target market and market size! If you are just joining us, we recommend you start by completing Module 1: How to Write an Application 101, Module 2: Value Proposition and Module 3: Customers.

Overview

No matter how great your product or service is, it is unlikely that an entire country (or continent!) is going to become your customer. Clearly defining your target market is important because businesses cannot afford to target everyone, so with a well defined target market, it is much easier to determine where and how to market your product or service. Your target market represents the potential buyers for your product or service, and understanding your market size (the number of people in your target market) is necessary to demonstrate the need for your products or services and to plan for future growth.

• First, what is a target market, and how is it different from your target customer(s)? A target market is a group of people that have been identified as potential customers for a product/service because of their shared characteristics such as age, income, and lifestyle. This is different from your target customer in that a target market is a more broad group of potential customers defined by ranges. 

• Example: For a healthy food business, you might describe your target customer as a 30-year old lawyer living in a specific town with two young children who prioritizes healthy eating but is too busy to cook - this is the very specific individual who you think is the best fit for your product. However, your target market opens up to include a wider set of demographic ranges that this customer falls into - women between the ages of 25-60 living in [city/region/country] with a household income greater than [X].

• Second, why is it important to understand your target market? For your business to thrive, you need to know who your customer is. This knowledge will help you to target customers who are willing to pay for your product or service. Identifying your target market is a more effective and affordable way to reach your customers and generate business. If you don’t clearly define your target market, you will be wasting time and resources targeting the wrong people for business. By understanding your market, you can promote your product or service more effectively to the right customer group(s).

• Third, what is the size of your target market? Now, only you can answer this question as it is dependent upon who you consider to be potential customers, but we will provide you with some tips on how to determine your target market and calculate your market size.

Understanding who is in your target market requires a mix of internal customer research (getting to know your customers and their needs) and external market research (demographic data for the city or country you are targeting).

We’ve already covered the internal customer research piece in Module 3: Customers (be sure to go back and complete that learning experience now if you have not done so already!) 

The external research can be a bit more challenging, especially depending on the accessibility of data. However, with some creative research and a few educated guesses, it’s possible for any business to estimate market size.

• Market Research: Once you’ve determined the groups that fall within your target market, it’s time to research how many people fall within each of those groups. It helps to start with very broad research, which is more readily available, and then dive deeper into the specifics. The simplest data point to start with is population: How many people live in the country(ies) you are targeting? From there, you can start to get more specific.

• If you are targeting a more specific geographic area (certain cities/regions), how many people live in those areas?

• If you are targeting a specific gender, what percentage of the population is male/female?

• If you are targeting people of a certain age, what percentage of the population falls into that age group?

• If you are targeting people with a certain level of income, what percentage of the population falls within those income brackets?

• If you are targeting people with a specific educational background, what percentage of the population has earned their [bachelor’s, master’s, PhD, etc.] degree?

• If you are targeting people who have certain hobbies, what percentage of the population participates in those activities?

• If you are targeting people that require access to technology, what percentage of the population has access to the internet (or a computer or smartphone)?

• Data Sources: You may be surprised how much data is readily available if you know the right questions to ask. Below is just a small sampling of data sources that can be useful in conducting your market research.

• Google: Be as specific as possible in your search queries. “How many female lawyers live in Nairobi?” If your query does not return any useful results, you can always make the question a bit broader. “How many lawyers live in Nairobi?” or “How many female lawyers live in Kenya?” 

• The World Bank: The World Bank provides access to some very useful demographic data, sorted by country and indicator. We encourage you to scroll through the list of available indicators, as they may provide ideas of ways to segment your market than you were not initially looking for.

• The African Development Bank: AfDB provides a data portal with information sorted by country, including specific data sheets on macro, SDG, and social data sets.

• Local census data: Your local government may also collect and share data. If you are struggling to find something at the town or city level, expand your search to a nearby city or town that you believe has similar demographics.

• Statista: Statista provides industry data, segmented by industry and country in many cases. Note that this platform requires a subscription to access much of their data, but some is available for free. Another option for industry data is industry-specific reports. While this information might be broader than what you are looking for, it gives you a good starting point.

• Educated guesses: Perhaps you’ve tried to do your research, but you are struggling to find detailed information on your specific demographics. This is where educated guesses come in. You can use some of the broader information available to make educated guesses about your specific market segments - the key word being “educated.” There has to be a logical reason behind each estimate. For example:

• If you cannot figure out a data point in your own country, can you find that data for a different country that has similar demographics (i.e. similar population size, similar GDP, similar rural/urban environment, etc.)?

• If you cannot figure out a data point in your industry, can you find that data for a different industry that functions in a similar manner (i.e. you cannot find the number of people who buy baby food, but you can find the number of babies born each year and thus can estimate the number of people who buy baby food will be similar)?

Now that you’ve done your market research, it’s time to put the data to work and calculate your market size. Market size refers to the total number of potential buyers for a product/service and the potential revenue reach based on that population size. Understanding market size will help you differentiate between the Total Addressable Market (TAM) - the total revenue opportunity for your product/service if you were able to get every single potential customer to buy your product - and the Serviceable Available Market (SAM) - the portion of the addressable market which you can realistically serve. In summary, your market size captures the customers you could potentially serve with your product/service, not the entire population of individuals that consume products/services like yours. We are going to focus on two different approaches to this calculation:

• The Top Down Approach looks at the overall market size for your product or service, and then calculates how much your business can earn from it. To arrive at your TAM using this approach, you have to start with the largest number and then refine it according to realistic estimations (using your market research) of your target market. Let’s break it down into actionable steps:

• Step 1: Total Market Size - Start with the largest number you have access to. In most cases, this will be the total number of people in your country. Example: If your business is located in Ghana, your total market size could start at 32 million.

• Step 2: Key Demographics - Next, we start reducing the size of our market based on key demographic characteristics of our market. While there is no exact number of demographics required, it’s always better to be more specific about your target market. Aim to include at least 3 key demographics. Example: If your business sells baby food from a storefront in the city, key demographics for your target market would be gender (female = 49% of the population), age (25-40 years old = 30% of the population), and location (Accra = 1% of the population).

• Step 3: Assumptions - Now that we know the number of potential customers in our market, we need to figure out what percentage of these customers we assume will actually buy our product or service. This is typically based on how much competition we have. Example: If there are 20 other major baby food producers in our market, a simple assumption would be that 5% of these potential customers will actually buy our product.

• Step 4: Addressable Market - Lastly, we bring it all together to calculate our addressable market (the portion of the market we can realistically serve). Since we are working with percentages, we multiple everything.

• (Market Size) x (Key Demographics) x (Assumptions) = Addressable Market

• (32,000,000 Ghanians) x (49% female) x (30% 25-40 years old) x (13% in Accra) x (5% market assumption) = 305,760 potential customers in our Addressable Market

• The Bottom Up Approach starts small, then gradually gets built up. First, you identify the segments you intend to reach. Then, make estimates based on market research to establish growth and size. Essentially, bottom-up market sizing looks at where your product/service can be sold and how many buyers you can serve. This approach works well if you have access to more specific data about certain market segments. Let’s break it down into actionable steps:

• Step 1: Key Market Segments -  Start by listing a few different key groups of customers you are targeting. Again, while there is no exact number of market segments required, the more segments you target, the larger your potential market. Aim for at least 3 segments. Example: Our baby food company plans to sell to mothers with newborn babies in Accra, mothers with toddlers in Accra, and childcare centers in Accra.

• Step 2: Size of Market Segments - Next, we use our research to cite specific numbers of customers. Example: Our baby food company plans to sell to mothers with newborn babies in Accra (2,730), mothers with toddlers in Accra (8,190), and childcare centers in Accra (200).

• Step 3: Calculate Addressable Market - Lastly, we bring it all together to calculate our addressable market (the portion of the market we can realistically serve). Since we are working with exact numbers instead of percentages, we add everything up.

• (Market Segment 1) + (Market Segment 2) + (Market Segment 3) = Addressable Market

• (2,730 newborn mothers) + (8,190 toddler mothers) + (200 childcare centers) = 11,120 potential customers in our Addressable Market

So which approach is better? Since neither provides a complete picture of your market, we recommend doing both Top Down and Bottom Up. The best way to tell if you have an accurate understanding of your target market is when your Top Down market size and your Bottom Up market size are similar. (You may need to adjust your data inputs on one model or the other to make this happen - in the case of our baby food example, we likely need to be more specific with our key demographics in the Top Down Approach to reduce our addressable market and add an additional key market segment or two in our Bottom Up Approach to increase our total addressable market.)

AWEC is an experiential, applied learning program, which means we promote business growth by having fellows immediately apply what they learn to their own business. We have created the following tools to help you apply the knowledge from this module to your business. We encourage you to download the tools below to strengthen your application AND your business!

Well done to you for completing your fourth module. You can now move on to Module 5: Business Model.