How big to make it depends on what type of dog you're making it for. You could make it small enough for a chihuahua or large enough for a St. Bernard...though I've no idea why a St. Bernard would need a sweater.
It is cute and I think if you made them for a specific size/type of dog they would sell. Maybe you need to do some market research and see what's selling. A site like etsy might be a good place to start looking.
Happiness is catching that dropped stitch while it's still fixable..