How to estimate a market size in 5-10 minutes

Do you ever wonder how the numbers in market estimates come about? And how can these numbers be so “precise”? For example, I just saw a market size estimate of USD 25.73 billion for the global shampoo market. Why not 21.92? Or 4.67? Or even 98.32? How could you check the plausibility of these numbers?

In this article, I'll show you how you can estimate market sizes, using quick, back-of-the-envelope calculations. Estimating a market size this way should not take you more than five or ten minutes.

Enrico Fermi, a master estimator

A while ago, I read a book about the great physicist Enrico Fermi (he is in the featured image of this article). The book is “The pope of physics”, by Gino Segrè and Bettina Hoerlin. Highly recommended reading.

Apparently, Fermi liked making back-of-the-envelope calculations. He was notoriously good at getting approximate answers to complex questions. In doing so, he only needed very little data. This way he could estimate, for example:

• “How many piano tuners are there in Chicago?”
• “What is the mass of all the automobiles scrapped in North America this month?”

These “Fermi questions” are very similar in kind to market estimate questions: in order to answer them precisely, you would have to put in massive efforts. Or… you could try to estimate, just like Fermi did.

How to Fermi yourself toward a reasonable market estimate

As an example, I will look at the market for robotic lawn mowers here. And I will cheat a bit. I will use data from the web, mostly from Wikipedia.

The physicist Enrico Fermi was a master estimator. But compared to him, you have a huge advantage: access to the web. This gives you lots of useful data points that you can use for your estimates.

My estimation method here is based on the number of units to be sold: If you know what a unit is and how much one unit costs, you know how many of the units would have to be sold in order to meet a certain market size.

Let's look at the robotic lawn mowers first.

How big is the global robotic lawn mowers market?

I used Mergeflow’s market estimate extractor tool to find a recent estimate for the size of the global robotic lawn mower market. The report said that for 2020, this market would be USD 1.3 billion.

A robotic lawn mower. Image by Bosch.

How can we get a reasonable approximation to see if this makes sense, and not spend more than 20 minutes on our estimation?

First, let’s define a “unit to be sold” and its price. Then, if we divide the market size by unit price, we get the number of units that would need to be sold. Here we are lucky, because the unit is one robotic lawn mower.

Then I checked Amazon, and one robotic lawn mower sells for ca. USD 600. Therefore, in order to have a USD 1.3 billion market, we'd have to sell...

USD 1,300,000,000 / USD 600 = 2,166,667 robotic lawn mowers

Is it possible to sell more than 2 million robotic lawn mowers in one year?

Let’s assume that households, rather than individual people, buy lawn mowers. This means we need to address the following questions:

1. How many households are there globally?
2. How many of these households have a garden? (if you have a garden, you probably have lawn to mow)
3. How many households with gardens (and lawns) use a robotic lawn mower, as opposed to manual or non-robotic lawn mowers?

How many households are there globally?

Wikipedia has a list of countries by number of households. Here is a part of this list:

You can use this table for doing all kinds of market estimates where households play a role, not just for robotic lawn mowers.

Wikipedia has useful data that can inform market estimates. This includes public company revenue data and population numbers, for instance.

From the “number of households” table, we learn that…

Number of households worldwide = 1,600,000,000

How many households have a garden?

I did not find data on how many households have a garden. So we have to estimate. How about 5-10%? Let’s say 5%. If 5% of all households worldwide have a garden, then there are…

5% x 1,600,000,000 = 80,000,000 households worldwide with a garden.

How many households with a garden and lawn might use a robotic lawn mower?

Again, we have to estimate. How about 10%? Assuming this, we get…

10% x 80,000,000 = 8,000,000 households with a garden that might use a robot lawn mower

Above, we estimated that the number of units to be sold in 2020 is ca. 2,000,000, if the market size estimate of USD 1.3 billion were to work out. So does it work out?

The data and estimates we have suggest that of 8,000,000 households using a robotic lawn mower, 2,000,000, or 25%, would have to buy one in 2020. This seems a bit high to me. On the other hand, if we were to assume that not 10% but 15% of lawn-having households might use a robotic lawn mower, we’d have 12,000,000 households. Then, the 2,000,000 new lawn mowers would be 17%, not 25%. This seems a bit more attainable.

We can now play with our data a bit more. For example, we could stick to the 8,000,000 households that use robotic lawn mowers. Then we could assume that many of these households already have a lawn mower, and that only 10% buy a new one in 2020. This would be 800,000 households. And 800,000 x USD 600 (our unit price) = USD 480,000,000. So, perhaps a very conservative lower bound for our market estimate could be USD 480 million.

But you are just making assumptions!

Yes. I agree. But now the methods and the assumptions are out in the open. It’s easy now to put them into a spreadsheet, and see what happens if I change one of my assumptions. Also, now I can discuss any plausibility check I did above with others. And to me, this is one of the greatest benefits of the Fermi method. It is a lot less about being right than it is about triggering useful discussions.

Check out the full article here.