Posted By IndustryArchive.Org on 03/16/2018 Marketing Strategy

How to Determine How Big Your B2B Target Market Is

By: Robert Hennessey

How to Determine How Big Your B2B Target Market Is

Do you know how to determine the size of your B2B target market?

You may be surprised that the actual addressable size of your target audience is considerably less than you may have thought. The addressable market size for this discussion is how many B2B customers you can sell at any given point in time. By knowing the actual size of your market will help you become more successful and profitable.

Most business professionals think they know the answer to this question. Ask a business professional how many potential customers they can they sell at any given point in time, and the response you get are everybody in our industry or somewhere between the 10,000 to 100,000 firms or I don’t know.

Why Market Size Matters

Is it essential to know the answer to this question? Yes, this is very important, if you want to plan a successful marketing strategy to meet and maximize your sales projections and allocate the required marketing resources efficiently and necessary to reach your goals.

How big a sales universe you have is fundamental to being able to begin to answer the question, how many potential customers can we sell at any given point in time?

By overestimating the size of their potential addressable market, many businesses will then miscalculate the crucial following marketing goals.

  • How many sales can the business make in a year?
  • How much profit will the sales generate?
  • How many marketing dollars are required to achieve the sales and profit goals?
  • How many ROI dollars will we generate for a given marketing campaign or an entire year?

Defining & Calculating Addressable Market Size

So how do you determine the real size of your target audience at any given point in time? It begins by knowing the size of your sales universe.

Step 1 - Determine Your Sales Universe

The number of companies in the market you can sell to is your sales universe.

Step 2 – Determine the Propensity to Purchase

To do this, you will need to answer; the question, how often do your customers purchase the types of products or services you sell. Do the typically or on the average buy or replace your products every month, every six months, every three years or every five years?

Step 3 – Determine Purchase Cycle Length

You need to know the length of the purchase cycle for your products and services. From the time, your customer begins to think about buying your product or service until the actual purchase. Is it 30 days, six months one year or eighteen months?

Step 4 – Competitor Market Shares

The last component of this answer relates to your market share position visa-a-via your competitors. Is there a dominant or more than one competitor with significant market shares?

Knowing your market share will allow you to calculate reasonable market share increase amounts allowing for the state of the economy in general, your industry in particular and the extent of market growth you might be projecting.

Now let’s look at an example to answer the question how big is my target audience. Most importantly how big is my target audience that can buy my products or services at any given point in time.

Example of How to Calculate Your Addressable Target Market Potential

Assumptions in this example are as follows:

  1. Total Sales Universe = 20,000 companies
  2. Industry Propensity to Purchase = Once every 3 years
  3. Product/Service Purchase Cycle = Six months
  4. Market Share Factor = Two dominant competitors own 50% of the market & they will defend their share

Addressable Market Calculations are as follows:

  • The total sales universe adjusted for the Propensity to Purchase

    Total Customer Universe = 20,000 Companies divided by a Propensity to Purchase of 3 years = 6,666 companies

(The result is that because the propensity to purchase is only once every three years only one-third of the universe is in the market during any 3-year period.)

The new adjusted sales universe is now 6,600 companies

  • The new sales universe of 6,600 firms adjusted for the Length of the Purchase Cycle

Total Revised Customer Universe = 6,600 companies

The Length of the Purchase Cycle is every six months

(Because there are two six-month periods in a year, half the universe is outside of the purchase cycle during each six-month period.)

Now divide the 6,600 companies by the Length of the Purchase Cycle expressed as the number 2, and there is a new reduction in the size of the sales universe to 3,300 companies

  • Competitor Market Share Adjustment

In this example, of two dominant competitors that control 50% of the market between them, we assume they will be defending their share we need to adjust our sales universe again.

(Because two dominant competitors monopolize a combined 50% market share, only 50% of the market is available to all other competitors.)

Now, divide the 3,300 companies by the Competitor Market Share adjustment expressed as the number 2 given the 50% market share of these dominant competitors.

Finally, divide the remaining 3,333 Companies ÷ by 2 = 1,666 companies

The real available target market is 1,666 companies to sell at any given point in time out of a starting universe of 20,000 companies.

Knowing that your real market potential is only 1,666 potential customers’ verses 20,000 makes a significant difference in setting your sales and marketing goals including:

  • Sales Forecast
  • Marketing Budget
  • Marketing Tactics
  • Profit Projections
  • ROI Goals 

Takeaway
If your company does not know the addressable market potential for your company, it can lead to a host of bad decisions, leading to a host of negative results for your business. You will make better B2B marketing decisions by knowing the correct market potential for your products and services.

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