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Market sizing

How to determine your market size.
Written by Max Valentine
Updated 10 months ago

Size of the market is a key focus for you and your potential investors and bigger is not always better. The first real thing to mention is that as a data point, the market size will only ever be a ballpark estimate as things change and data at this scale is imperfect but it tells the investor the potential of the business and the ambition of the team. Why do we need this for financial forecasts? Well it acts as a sanity check and an indication of the company's forecasted market share.

Your product or service could be for everyone but it is too punchy to assume this is the case. In trying to serve everyone, such businesses end up serving noone and very quickly run out of steam.  Instead, you need to take the time and effort to really think through who you are looking to serve and why - what is your market segment, your niche.

In the mainstream investment world, there are three relative market sizes which hone closer and closer to the realistic size, in other words, working from a macro to a micro view from the biggest the market can get to the market you can realistically corner...

Total Addressable Market (TAM) - this is the total worldwide market for your product - this represents 100% of your market.

Serviceable Available Market (SAM) - As securing 100% market share is unlikely, we take a subsect of the TAM that you target or are relevant to your produce or service and given your geographic reach i.e. your niche

Serviceable Obtainable Market (SOM) - the subsect of the SAM that you can realistically capture given current market conditions and competition. The SOM could be your revenue target and the value of the share that you aim to capture.

It is important to provide a context to the market size. in some markets, a market share of a few percentages can already bring a huge cash inflow whereas some start-ups must become market leaders to survive. Also market growth is key - are you in a growing market or a contracting one - the metric to measure this is the Compounded Annual Growth Rate (CAGR) - over 10% and you are in a good place. A growing markets means that the market players will have growth opportunities as well.

The best is to start with your TAM and work back from there - so ways to work out your TAM

Top down - looking at the macro, a subsect of customers who share characteristics and will demand, use and buy your offering. If you have a view of your customer type, you can use data from the World Bank, OECD or CIA World Factbook to fund out the number of potential customers, the size, of this segment. You can multiply this by your average price.

Bottom-up analysis - starting with the micro, determine your immediate market size and then build this picture up to a global view. This is better than Top down as you a basing the foundation on far more reliable data. You can multiply this by your average price.

Value theory is useful for completely new offerings. It is built on the premise how much value the company will add and why it should capture this value. This is the most dark art - the core question is "How would a consumer pay to do x instead of y?" - that is the value created and then the value capture is a portion of this through the pricing.

Useful to know

Now, the places where you can get some sources. For a top down, there are loads of places where you can source some data to support your argument. If you have the budget, you can look at paid-for research and market reports from such sites as:

  • https://www.marketresearch.com/
  • https://www.marketsandmarkets.com/
  • https://www.alliedmarketresearch.com/
  • https://www.statista.com/

To be honest, there are a lot of providers if you're happy to spend north of £2,000. However, if you are on a tighter budget there are a number of other sources to consider

  • Consultant Papers - The "Big 4", namely PWC, Deloitte, Accenture and Ernst and Young, as well as the strategy houses and investment banks all produce incredibly well researched (and bankable) white papers and information documents.
  • Other businesses' pitch decks - OK so not the most bonefide route but you can get a steer from similar companies or look at their source or rationale.

Top tip

Use the google search hacks to find reports - you can search directly for PDFs by googling "filetype:pdf" and then entering your search criteria. You can often discover some hidden gems on the web that are from a good source but be wary that the older the report the less valid it is. You can also use this method to find word docs (":doc") and excel sheets (":xls")


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