Understanding SaaS Market Size Analysis

Before starting a new SaaS company or launching a new tool, it’s important to first understand the size of the market you’re trying to reach. This process is called market size analysis, and it’s a crucial part of any business plan. By understanding the market size, you can make informed decisions about things like SaaS pricing, marketing, product development, and more.

One of the reasons why many SaaS startups fail is because they didn’t bother to properly assess the size of their target market. As a result, they either overestimated or underestimated the potential customer base.

In this blog post, we’ll discuss the different ways you can measure the size of a market and how market size can impact business decisions.

What Is a SaaS Market Size Analysis?

A target SaaS market size analysis is a process of determining the total number of potential customers for a SaaS tool. This information is used to make informed decisions about starting a new SaaS company or launching a new solution.

There are several methods that can be used to conduct a market size analysis, including surveys, interviews, and focus groups. The most important part of any market size analysis is to ensure that the data is accurate and representative of the target audience. Without accurate data, it is difficult to make sound decisions about starting a new business or launching a new product.

Measuring Market Size

There are two main ways to measure the size of a market:

By the number of potential customers

To calculate the number of potential customers, you’ll need to gather data on things like population size and demographics. You can also look at things like internet penetration and the number of people who own a particular type of device.

For example, if you’re launching a new app that requires a smartphone, you’ll need to know how many people in your target market own a smartphone.

By the total amount of money those SaaS customers are willing to spend

To calculate the total amount of money those customers are willing to spend, you’ll need to look at things like income levels and spending habits. You can also look at data on things like the average price of a product or service in your market.

For example, if you’re launching a new cloud-based accounting software, you’ll need to know how much money businesses in your target market are willing to spend on accounting software. The best way to do this is to look at the existing market for accounting software and see what prices are currently being charged.

Both of these methods have their pros and cons, so it’s important to choose the one that makes the most sense for your business. For example, if you’re launching a new SaaS solution that requires a specific type of device, it may make more sense to focus on the number of potential customers. On the other hand, if you’re launching a new SaaS solution that businesses will need to budget for, it may make more sense to focus on the total amount of money those customers are willing to spend.

Why Market Size Matters

Market size matters because it allows you to make informed decisions about things like pricing, marketing, and product development. For example, if you’re launching a new app, you’ll need to know how much demand there is for that app and what price point will allow you to reach your target market.

If you’re starting a new SaaS company, you’ll need to know whether there’s enough potential customer demand to justify your investment. And if you’re doing any type of SaaS marketing or advertising, understanding market size will help you determine where to allocate your resources for maximum impact.

Examples of How Market Size Can Impact Business Decisions

To better understand how market size can impact business decisions, let’s take a look at a few examples:

• Pricing: If you want to maximize profits, you’ll want to set your prices based on what the market is willing to pay. If your target market is small, you may need to charge higher prices in order to make a profit. On the other hand, if your target market is large, you may be able to charge lower prices and still make a profit
• Marketing: Your marketing efforts should be focused on reaching your target market. If your target market is small, you may need to use more targeted marketing methods like direct mail or online ads. If your target market is large, you may be able use less targeted methods like TV or radio ads
• Product Development: The size of your target market will also impact your product development decisions. For example, if your target market is small, you may not need to develop as many features for your SaaS solution since there aren’t as many potential customers who would be willing to pay for them. On the other hand, if your target market is large, you may need to develop more features in order to stay competitive since there are more potential customers who are looking for those features in a product.
• ROI Projection and Exit Strategies: Formulating expectations about ROI (return on investment) and exit strategies is an important part of starting any business. After all, if you don’t know how much money you need to make or when you’ll be able to sell your company, it will be very difficult to achieve your goals. 

Fortunately, understanding market size can help you develop realistic expectations for both ROI and exit strategies.By knowing the total addressable market for your SaaS tool, you can better estimate the amount of money you’ll need to invest in order to achieve a given level of sales. Additionally, understanding the market size can also help you identify potential acquirers and develop an exit strategy that makes sense for your business.

Factors to Consider When Conducting a SaaS Market Size Analysis

When conducting a SaaS market size analysis, there are a few key factors you need to consider

• The geographical scope of the market: This is the geographic area that your target market is located in. For example, if you’re launching a new SaaS tool, you’ll need to consider whether your target market is global, national, or regional.
• The spending power of your target market: This is the amount of money that your target market is willing to spend. For example, if you’re launching a new app, you’ll need to know how much demand there is for that app and what price point will allow you to reach your target market
• The level of competition in the market: This is the number of other companies who are competing for your target market’s attention. For example, if you’re launching a new SaaS company, you’ll need to know whether there’s enough potential customer demand to justify your investment and what your chances are of success given the level of competition

How to Conduct a Market Size Analysis

In order to determine an accurate target market size, there are a few steps you need to take.

Segment Your Market

Segmenting your market means finding out who your target customer is and dividing them into groups based on common characteristics. For example, you might segment your market by industry, company size, or location. Once you’ve segmented your market, you can begin to look at each segment’s potential. To help you segment your market, consider using market research tools like surveys, interviews, and focus groups.

Research About Your Industry Potential

Each industry has different potential when it comes to SaaS adoption. For example, the healthcare industry is notoriously slow to adopt new technology, while the retail industry moves at a much faster pace. It’s important to understand the potential of each industry segment you’re targeting before you can accurately determine your target market size. Try reading industry publications or talking to experts in your field.

Study Company Size Potential

Typically, smaller companies are more nimble and willing to try new things than larger companies. That being said, there are always exceptions to the rule. For example, large companies in highly regulated industries (e.g., healthcare) tend to be more risk-averse than other types of businesses.

Assess Location Potential

Some locations are simply more conducive to SaaS adoption than others. For example, tech-savvy cities like San Francisco and New York tend to be early adopters of new technology, while smaller towns and rural areas tend to be slower to adopt new trends. Keep this in mind as you consider the potential of each location you’re targeting 

Analyze Your Competition

This will give you a better understanding of who else is selling SaaS solutions similar to yours and how well they’re doing it. Try conducting a SWOT analysis of your competitors to get started.

Segmenting Your Target Market: Top Down vs. Bottom Up

When it comes to marketing, there’s no such thing as a one-size-fits-all approach. In order to be successful, you need to zero in on your target market and craft your message accordingly. But how do you go about doing that? The answer lies in segmentation.

There are two main ways to segment a market:

The Top-Down Approach

A top-down approach is a strategy that begins with the identification of a large market opportunity and then narrows it down to a specific segment that represents the most potential for growth. This approach can be used in a number of different contexts, from product development to marketing. For example, if you wanted to target all luxury car buyers, you would start by segmenting the market by income level, then age, then type of car.

One of the main benefits of a top-down approach is that it allows businesses to quickly enter into a new market and gain a significant share of the market. Additionally, by starting with a large market, businesses can more easily scale up their operations as demand grows.

However, a top-down approach also has some risks, as it can be difficult to accurately identify the most promising market segments. Additionally, businesses may find themselves competing against well-established firms that have already established themselves in the target market.

Top Down Segmentation: Advantages and Disadvantages

Advantages

• Starts with a large known market, so you have more data to work with from the outset
• Can be useful for targeting very specific markets that may be hard to define using other methods

Disadvantages

• If not done correctly, can result in targeting too small of a market
• There is always the potential for exclusive markets, which can limit potential growth

The bottom-up approach

This approach entails trying to count all prospective customers and multiplying by price. This is useful for smaller or not-yet-existing segments without a good starting point. For example, if you wanted to target cyclists who commute to work, you might start by counting all cyclists in your city, then multiplying that number by how much each person would be willing to pay for your product.

The goal of this approach is to generate as much revenue as possible by targeting a large number of potential customers. This approach can be effective in certain industries, such as the automotive industry, where there are a large number of potential customers with a wide range of income levels.

However, it can also be risky, as it requires a significant investment in marketing and advertising. Moreover, if the number of potential customers is overestimated, the bottom-up approach can lead to losses. As such, businesses must carefully consider whether the bottom-up approach is right for them before implementing it.

Bottom Up Segmentation: Advantages and Disadvantages

Advantages

• Can be used for small or not-yet-existing markets
• More accurate than top down when estimating total addressable market size
• Less exclusive than top down, so there is more potential for growth

Disadvantages

• Can take more time than top down because of the need to gather data from scratch
• May result in oversegmentation if not done carefully

No matter which approach you use, it’s important to understand your target audience’s needs and wants. There are three main ways to do so:

Market Sizing Methodologies

• Published studies can be a helpful starting point, but it is important to keep in mind that they may not always be accurate or up-to-date.
• Hiring a research firm is another option, but this can be expensive and may not be necessary if you are only looking for a rough estimate.
• Self-service primary research can also be effective, and is often much more affordable than hiring a research firm. This involves conducting your own surveys or interviews with potential customers.

There is no right or wrong answer when it comes to choosing between top down and bottom up segmentation; the best approach depends on your specific business needs and goals. If you’re selling products or services to a very specific niche market, top down segmentation may be the way to go.

However, if you’re selling products or services to a less defined market or are looking to expand into new markets, bottom up segmentation may be a better option. Ultimately, the most important thing is that you take the time to understand your target audience’s needs and wants so that you can craft the perfect message for them.

Final Thoughts

Before making any investment, it is essential to understand the size of the market you are hoping to enter. This information can help you to assess the level of competition, identify potential growth areas, and understand what type of investment is required to be successful.

However, market size analysis is not always straightforward. In addition to looking at the overall size of the market, you also need to consider factors such as demographics, purchasing power, and spending patterns. By taking all of these factors into account, you can get a clear picture of the market you are hoping to enter and make informed decisions about your investment.

Meanwhile, there are a few steps you need to take in order to determine an accurate target market size, including market segmentation, industry potential, company size potential, and location potential. Keep these factors in mind as you develop your business plan and you’ll be well on your way to success.

Do you need more help in growing your SaaS? Check out our blog for more tips and best practices.