An integral part of any startup's business plan is market sizing. Merely determining the quantity of prospective clients is only one aspect of the matter. It's also about realising the extent of your opportunities and potential obstacles. This guide will walk you through the basic concepts of market sizing and demonstrate how you can utilise such a concept to put your firm on a rapid trajectory to success.
What is market sizing?
Estimating a market's potential for a given good or service is known as market sizing. It's an essential component of market research that aids in determining the magnitude of the opportunity, establishing reasonable goals, and luring investors for businesses. Making wise judgements about product development, marketing tactics, and business scalability requires an understanding of market size.
Components of market sizing:
There are three critical components of market sizing that every startup founder should understand:
- Total addressable market (TAM): This is the total market demand for a product or service. It's the maximum amount of revenue a business can generate by selling its product or service in a particular market.
- Serviceable available market (SAM): This is the segment of TAM targeted by your products and services which is within your geographical reach.
- Serviceable obtainable market (SOM): This is the portion of SAM that you can capture. It's a realistic view of what you can achieve in the short to medium term.
How to conduct market sizing
Market sizing can be approached in two ways:
- Top-down approach: This method uses industry data to estimate the market size and then narrows it down to your specific segment.
- Bottom-up approach: This involves estimating the market size based on product pricing and potential customer base.
Both methods have their pros and cons, and using them in tandem can provide a more comprehensive understanding of your market size.
Bottom-up
🚀 Suitable for: Innovative startups that don’t know (or have) their specific market niche yet.
👍 Advantage: Accurate view of the market.
👎 Disadvantage: Time-consuming + requires high data precision about individual customers/market segment and more resources.
Top-down
🚀Suitable for: Startups aiming to operate in well-established markets.
👍 Advantage: Quick and less resource-intensive.
👎 Disadvantage: Too generic and not very accurate.
Market Sizing in Action
Top-down market sizing
To see the full example visit: https://miro.com/miroverse/market-sizing-for-startups-template/
The top-down approach begins with a broad industry perspective and narrows down to your specific target market. Here's how to conduct a top-down market sizing analysis:
- Global market size: Start by identifying the overall global market size for your industry from industry reports, market research firms, or credible online resources.
- Segment the market: Determine what percentage of the global market represents your target region or demographic. Calculate your Serviceable Available Market (SAM) by applying this percentage to the global market size.
- Estimate market share: Based on your business plan, competitive analysis, and unique selling proposition, estimate the market share you can realistically capture. This gives you the Serviceable Obtainable Market (SOM), which is your short-term target market size.
Bottom-up market sizing
To see the full example visit: https://miro.com/miroverse/market-sizing-for-startups-template/
The bottom-up approach calculates market size based on your product’s pricing and potential customer reach. Here are the steps:
- Pricing strategy: Determine the pricing of your product or service. Consider factors like production costs, competitor pricing, and perceived customer value.
- Potential customer base: Estimate the number of potential customers in your target market. Use demographic data, surveys, or industry reports to inform your estimate. [we could include link to the ICP]
- Annual revenue per user (ARPU): If your product or service has recurring revenue (like a subscription), multiply the regular price by the number of payment periods in a year to get the ARPU.
- Market size calculation: Multiply the ARPU by the estimated number of potential customers to calculate your market size.
Combining both approaches
Using both top-down and bottom-up approaches provides a well-rounded view of your market potential. The top-down method offers a macro perspective, while the bottom-up approach gives insight into what is achievable based on your specific business model and pricing strategy. Comparing the results from both methods can help in identifying discrepancies and refining your market size estimate.
Market sizing is an invaluable tool for startups. It helps you understand the potential of your market, guides your business strategies, and assists in attracting investment. The way you calculate the market size shows investors how well you understand it, as this is one of their crucial evaluation criteria. Remember, a well-researched market size can make the difference between a startup's success and failure
To effectively apply the insights from the article and strategically plan your startup's market sizing, consider using the Miro board or the Notion template we’ve created. They’re designed to guide you through the process of defining your TAM, SAM, and SOM, and facilitating a structured approach to understanding and capturing your market potential. Or just get in touch with us. After all… we’ve made them, we surely know a thing or two about market sizing.
