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How do you measure the market potential and growth rate for a fintech start-up?

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Fintech start-ups are disrupting the financial services industry with innovative solutions and business models. But how do you know if your idea has enough market potential and growth rate to succeed? In this article, we will explain some key concepts and methods to measure the market size, segment the customers, and estimate the growth rate for a fintech start-up.

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Peter Faleskini
Ben Chika

Building Startups | Marketing Products | Brand Storytelling | No Code, Just Results

1 Market size

Market size is the total revenue or demand that your start-up can potentially capture from your target customers. It indicates how big the opportunity is for your fintech solution. To estimate the market size, you need to define your value proposition, identify your target market, and collect data on the existing or potential customers, competitors, and industry trends. You can use different approaches to calculate the market size, such as top-down, bottom-up, or value-based methods.

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Peter Faleskini
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Actually, I disagree with the definition that market size is the total revenue or demand that your start-up can potentially capture from your target customers. I would define market size as the total money spent last year on a similar product or service in a certain region.

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Ben Chika

Building Startups | Marketing Products | Brand Storytelling | No Code, Just Results
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A way of getting Market size for any product (other than just looking at projections) is to take a look at the entire amount spent on that product and its alternative in the previous year.

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2 Market segmentation

Market segmentation is the process of dividing the market into smaller groups of customers who share similar characteristics, needs, preferences, or behaviors. It helps you to focus on the most profitable or attractive segments, tailor your marketing and sales strategies, and differentiate your fintech solution from the competitors. You can use different criteria to segment the market, such as geographic, demographic, psychographic, or behavioral factors.

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Ben Chika

Building Startups | Marketing Products | Brand Storytelling | No Code, Just Results
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Market segmentation is how you know you are getting serious about your product. Whenever someone comes up with an idea of a product that can serve everyone, it shows they haven't really gotten down to ask; who needs my product? Understand that market segmentation can start small and then expand, but every product must start with a segmented market.

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Peter Faleskini
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Market segmentation is a two-sided sword. It helps you focus on certain parts of the market(when done correctly most lucrative). However, it might also leave out a huge part of the market that your team failed to identify during the segmentation process.

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Danny L.

Startup Marketing, GTM | 4x VP Marketing | 3x Founder | 2x Exits | Host of 'How to Build an Empire' podcast | #BuildAnEmpire
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In my experience, to measure a fintech startup's market potential, I research the total addressable market size it can reach, examine growth projections for relevant industry segments, benchmark adoption metrics of competitors, estimate target customer volume and transaction value, and model early traction forward based on costs to acquire and expand. I refine projections over time with new data, developing both a top down total market view and bottoms up customer-driven estimate incorporating macro trends and reasonable penetration given the value proposition.

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3 Growth rate

Growth rate is the percentage change in the market size or revenue over a period of time. It indicates how fast the market or your start-up is expanding or contracting. To estimate the growth rate, you need to project the future market size or revenue based on historical data, industry trends, customer feedback, and competitive analysis. You can use different methods to forecast the growth rate, such as trend analysis, regression analysis, or scenario analysis.

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Peter Faleskini
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The growth rate is most accurately calculated for the past. But past growth does not necessarily indicate future performance and the same is true for past shrinking of the market. A forecast is always a gamble.

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4 TAM, SAM, and SOM

TAM, SAM, and SOM are acronyms that represent different levels of market size and segmentation for a start-up. TAM stands for total addressable market, which is the maximum revenue or demand that your fintech solution can generate if you capture 100% of the market. SAM stands for serviceable available market, which is the portion of TAM that you can realistically reach with your current or planned resources and capabilities. SOM stands for serviceable obtainable market, which is the share of SAM that you can actually capture with your current or planned competitive advantage and differentiation.

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Ben Chika

Building Startups | Marketing Products | Brand Storytelling | No Code, Just Results
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I don't agree that TAM is the maximum revenue generated if you can capture 100% of the market. After all no product can truly capture 100% of the market. So, TAM remains the Total size of the market, SAM is the size of the market you can reach (not exactly service). SOM is the actual market size you can service in your planned future. With this definition, as your company grows, SOM and SAM will grow relatively while TAM would remain relatively constant only adjusting to changes in the global market. PS: A lot of these analysis would be estimates, but should be guided by factual data. When doing your analysis be optimistic, for the right product there is always more market demand than you envision.

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5 Example of market sizing and segmentation

To illustrate how to measure the market potential and growth rate for a fintech start-up, let's use a hypothetical example of a start-up that offers a mobile app for peer-to-peer lending in India. The start-up's value proposition is to provide an alternative and convenient way for individuals to borrow and lend money without intermediaries or high fees. The start-up's target market is the urban population in India who are smartphone users and have bank accounts.

To estimate the TAM, the start-up can use the top-down approach and multiply the total number of smartphone users in India (around 500 million) by the average annual amount of peer-to-peer lending transactions per user (around $200). This gives a TAM of $100 billion. To estimate the SAM, the start-up can use the bottom-up approach and multiply the number of smartphone users in urban areas in India (around 300 million) by the percentage of smartphone users who have bank accounts (around 80%) by the average annual amount of peer-to-peer lending transactions per user (around $200). This gives a SAM of $48 billion. To estimate the SOM, the start-up can use the value-based approach and multiply the SAM by the percentage of customers who are willing to pay for the start-up's app (around 10%) by the average annual fee per user (around $10). This gives a SOM of $480 million.

To estimate the growth rate, the start-up can use the trend analysis and look at the historical data on the smartphone penetration, bank account penetration, and peer-to-peer lending volume in India. The start-up can also use the scenario analysis and consider the different factors that can affect the future demand for its app, such as regulatory changes, customer preferences, competitive threats, and technological innovations. The start-up can then project the best-case, worst-case, and most-likely scenarios for its market size and revenue growth over the next five years.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Peter Faleskini
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The market potential is always an estimate - regardless of the method you use. If you estimate your market potential in order to pitch to VC you should be optimistic. If you estimate your market potential for internal use I would recommend a much more conservative approach.

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How do you measure the market potential and growth rate for a fintech start-up?

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1 Market size

2 Market segmentation

3 Growth rate

4 TAM, SAM, and SOM

5 Example of market sizing and segmentation

6 Here’s what else to consider

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