How does one go about judging the size of a market when they may be
creating a new one?

Dear forsytha:

First, you have to understand who your target market members are. 
Namely, who is going to be using your product or service?  Factors to
consider include gender, age, ethnic group, and level of income.

Once you understand the characteristics of who will be consuming your
product or service, the next step is to find out how many of them
there are.  Will you be selling your product worldwide or in a single
country?  Are there demographic trends influencing how many target
market members there will be over time?

Then, you need to try to figure out what your market penetration rate
will be.  Consideration of these factors is also relevant in
identifying who your target market members are in the first place. 
People only have 24 hours in the day and finite incomes, so if they
are going to be using your product or service, they will be spending
less time and money on something else.  Even if your product is a
complete departure from anything currently on the market, it will have
to displace something.  More likely, your product will share at least
some characteristics with a product or a combination of products
currently in use.  What are these products and what is the size of
their markets?  Is your product complementary or competitive to these
products?  Is there a product or combination of products that your
product works better with or that are required in order to use your
product?

Particularly if existing products or services are at least somewhat
similar to your innovation, you can not only gain an idea of how many
people will want to buy and how much money they will be prepared to
spend on your product, but you can also gain insight into who your
target market members might be.  Does nearly everyone sharing a set of
characteristics defining your target market members use existing
competing or complementary products, or is it relatively few, or is it
something in between?  This will define your market penetration rate.

Other characteristics of your product or service that are relevant to
determining market size and market potential relate to its longevity:
is it durable, nondurable, or a combination (think razors and razor
blades)?  What will it cost to manufacture or deliver ?  What is the
minimum rate of return you are willing to accept on your invested
capital?  How much capital will be required?  Will the product or
service rapidly become obsolete, necessitating further development or
resulting in a loss of market share?  Will it be a luxury item or a
commodity? Can it be successfully branded and differentiated from
competing products or services ? These factors will influence price,
which will in turn influence who will be buying your product or
service and how often they will be buying it.  Will there be an
expectation of a reduction in costs over time, perhaps because of
technological developments or economies of scale to be had in the
manufacturing process as larger quantities are produced?  These
factors could lead what is initially a low-volume luxury item to
become a high-volume mass-market item (think DVD players).

By identifying who will be buying your product, how many of them there
are, what percentage of them will be buying your product, how often
they will be buying it, and what price they will be paying for it, you
can derive an estimate of market potential.  By applying factors that
will change over time, such as demographic trends and factors that
will influence manufacturing costs, you can also estimate how the
market may change over the short term.  However, competing products or
services could arise unexpectedly and disrupt future forecasts.

I hope these questions, and the answers that you discover to them,
facilitate your creation of an estimate of the size of the market for
your new product or service.

Sincerely,

Wonko

ZBZ5! A very clear and comprehensive answer. Thank you.