Estimating market size

Estimating market size
SparkOptimus TeamBenedikt Lahninger
Written by
Benedikt Lahninger
&
The SparkOptimus Team
October 12, 2023
Content of this insight

<div class="insights_cta-component">This is the third article in our series covering the basics of digital due diligence. See the full series below.</div>

How to uncover market potential and growth using keyword data

So, you've stumbled upon the intriguing world of widgets in an industry you didn't even know existed until now. As you navigate, there’s chatter about the expansive online market size and rapid growth. But how do you sift through the noise and locate the facts, especially when traditional market reports seem absent?

Revisiting Ahrefs and SEMrush

Before we jump into market size, we need to figure out the key search terms that customers are using in this market. Remember the tools we touched on in the first article, Ahrefs and SEMrush? They're back in action. A quick run with Ahrefs will tell you the top organic search terms that are bringing in the traffic for your target. SEMrush is one of your go-to sites to see which keywords your target is investing in for paid ads. Together, these tools give you a solid keyword list that your target's users find them for.

Method #1: Market size estimate based on digital marketing spend

Armed with these terms, you can head over to Google Keyword Planner. Pretend you're setting up an ad campaign. Although you'll have to set up a Google Ads account (if you haven't already), the insights you'll gain are well worth the effort. Google, thinking you're a potential advertiser, will serve up essential metrics such as the monthly search volume, keyword competitiveness, and the probable cost per click (CPC). This data can be used to ballpark the market size. It's fairly straightforward: annualize the traffic from these target keywords (which is typically given in number of sessions per month) and multiply by the average CPC. Now you have your rough estimation of the digital marketing spend for paid search in this market.

Figure 1: To estimate paid search spend, annualize the traffic from your target keywords and multiply by the average CPC.

To extrapolate a general market size from this, take this figure and divide it by the usual digital marketing spend for comparable businesses. See below for some general guidelines:

Rules of thumbs for digital marketing spend (as % of gross revenue)

In this context, maturity refers to the size of the online market in relation to the entire market.

· Low maturity, low margin (e.g., second-hand goods, local services): 2-4%

· Low maturity, high margin (e.g., automotive parts, technical B2B retail): 4-8%

· High maturity, low margin (e.g., fast apparel, consumer electronics): 4-8%

· High maturity, high margin (e.g., travel platforms, enterprise-grade SaaS): 10%+

Figure 2: To get an estimate of gross revenue, divide paid search spend by the typical digital marketing spend. Adjust accordingly if there's a high reliance on other digital marketing channels besides paid search.
Method #2: market size estimation via AOV and conversion

Traffic numbers in hand, let’s now determine the market size through another angle. Our goal is to capture as many data touchpoints as possible for an increasingly reliable estimation. Therefore, we can take our traffic numbers and multiply them by assumed conversion and Average Order Value (AOV). This allows us to project revenues that can be had if we were to monetize the traffic.

AOV is a metric that often sits within easy reach. You're typically already aware of your product prices, and you likely have a grasp on the typical purchase volume per customer. The trickier aspect is conversion. This depends on many different factors such as traffic quality, UX, price setting, competition, and sector. Yet, for those in need of a quick estimation, we have some industry-specific guidelines at the ready.

Rules of thumbs for conversion (as % of trafficto order)

· High-AOV Products (e.g., luxury items, furniture): 0.5% - 2%

· Durable consumer goods (e.g., fashion, kitchenware): 1-4%

· Fast-moving consumer goods (e.g., food, groceries): 2-5%

Generally, high-AOV products may see a lower conversion rate because they often involve amore extended decision-making process. On the flip side, products with a more modest AOV might see increased conversions due to the lower risk and commitment associated with the purchase.

An Illustrative Example

Let’s assume you’re in the realm of kitchenware. We assume 1M visitors a month (12Mper year) to the complete list of targeted keywords in a specific region, and an AOV of €50. Additionally, you believe that a conversion of 2% is feasible, based on benchmarks above and the competitiveness of the subsector. Revenue potential can then be forecasted as follows: Market size = 12M x 2% x €50 = ~€12M

Sanity Checking & Recalibrating

Now we have our two ‘lower-bound’ market size estimates based on paid search and our targeted keywords. Lower-bound, because we only focused on the targeted keyword set, while the potential market is likely larger than just these search volumes. To ‘sanity check’ this market sizing, compare your findings with similar, more familiar markets. Conduct the same analysis using the Keyword Planner for any comparable market, and then juxtapose the results.

This side-by-side comparison doesn't just give you raw numbers, but also that all-important context. It offers a frame of reference to gauge whether the estimates for your target market are in the right ballpark. By making these parallels, you can build more confidence in your original analysis and identify any potential areas that might need recalibration. A common adjustment is accounting for online market penetration, as illustrated below.

Figure 3: Adjusting the market size estimate by comparing with a familiar market and factoring in online penetration.
Next step: Google Trends

While those initial figures give a solid starting point, you will want to see the bigger picture over time. For this - let's enter Google Trends. Pop in your keywords to witness the progression of interest. A steady increase in searches? That's a positive sign. Recognizable peaks and troughs? You're likely observing seasonal trends.

Figure 4: Example Google Trends output for the Dutch ebike market, giving a first impression of a growing market characterized by seasonality

Navigating the complexities of market analysis, especially in the absence of traditional market reports, can initially seem quite daunting. However, with tools like Ahrefs, SEMrush, and methods to estimate market size, you can unlock new, valuable market insights. Armed with these strategies, you're well-prepared to cut through the noise and uncover the facts needed to make informed business decisions in today's dynamic market landscape.

NEXT UP IN THIS ARTICLE SERIES

In the other articles, we are covering assessing market size, sizing up competition, and analyzing website traffic. All topics:

Analyzing Website Traffic – Evaluate traffic volume and organic vs. paid sources

Sizing Up the Competition – Identify who else is targeting the same keywords & audiences

Estimating Market Size – Approximate market size and growth using keyword data

Auditing Online Reviews – Validate a company’s customer proposition

Stay tuned!

We hope you're as excited as we are and of course, do let us know if you have specific topics or questions you would like us to share with you.

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At SparkOptimus, we perform these types of analyses every day, and we've been doing so for years. We also make sure to put these analyses into context and share our strategic insights about the results— you can find more information in our M&A service line.

For over ten years, SparkOptimus has been helping its clients achieve concrete results in areas that are more important now than ever before. This has led us to secure the top spot in digital consultancy in the Netherlands for the 6th time. If you have any questions, feel free to reach out — we’re here to help.

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