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Market Research

Objective: quickly estimate the size of a market using logical assumptions and back-of-the-envelope calculations. By using Fermi estimation for market sizing, you can quickly gain insights into potential market opportunities and make informed decisions about further research or investment.

tip

The goal is to arrive at a reasonable order-of-magnitude estimate, not an exact figure.

Principles​

Key Principles of Fermi Estimation for Market Sizing

  1. Break down the problem into smaller, more manageable components.
  2. Make reasonable assumptions based on known facts or common knowledge.
  3. Use round numbers to simplify calculations.
  4. Aim for an order-of-magnitude estimate rather than precise figures.

Process​

Step-by-Step Process

  1. Define the market: Clearly specify the product/service, target customers, and geographical area.
  2. Identify key variables: Determine the main factors that contribute to market size (e.g., population, usage frequency, price).
  3. Make educated guesses: Estimate values for each variable using logical assumptions.
  4. Perform simple calculations: Multiply or divide your estimates to arrive at a final figure.
  5. Sanity check: Compare your result to known facts or industry data to ensure it's reasonable.

Benefits​

Benefits of Fermi Estimation for Market Sizing

  • Speed: Allows for quick estimates without extensive research.
  • Flexibility: Can be applied to various markets and industries.
  • Logical thinking: Develops critical thinking and problem-solving skills.
  • Adaptability: Easy to adjust assumptions and recalculate as needed.

Limitations​

Limitations and Considerations

  • Accuracy: Fermi estimates are rough approximations and may not be suitable for high-stakes decisions requiring precise figures.
  • Bias: Be aware of potential biases in your assumptions and try to use multiple sources or perspectives.
  • Complexity: Some markets may be too complex for simple Fermi estimation and require more sophisticated analysis.

Example​

Estimating the US Market for Robotic Lawn Mowers.

  1. Define the market: Robotic lawn mowers sold to households in the US annually.
  2. Identify key variables:
    • Number of US households
    • Percentage of households with lawns
    • Percentage of lawn-owning households interested in robotic mowers
    • Average price of a robotic lawn mower
    • Replacement cycle (years)
  3. Make educated guesses:
    • US households: ~130 million
    • Households with lawns: ~70%
    • Interest in robotic mowers: ~10%
    • Average price: $1,000
    • Replacement cycle: 5 years
  4. Perform calculations:
    • Potential customers: 130M _ 70% _ 10% = 9.1M households
    • Annual purchases: 9.1M / 5 years = 1.82M units per year
    • Market size: 1.82M * $1,000 = $1.82 billion per year
  5. Sanity check: This estimate seems reasonable compared to published market research figures, which often place the global robotic lawn mower market in the low billions of dollars.