How To Effectively Determine Your Market Size

Determining your market size demonstrates the amount of business that exists in the market for your product or service.

Market size, or the number of potential customers or unit sales is one thing. Realistically, no startup should or can expect to gain 100% market share. How much is your product worth, is a completely different, and perhaps a more important figure. You need to know how much revenue can your product or service generate which is your TAM.

Determining TAM - Total addressable market

The Total Addressable Market (TAM), often known as the total available market, is the total revenue opportunity accessible to a product or service if it achieves 100% market share. In other words, it describes the total revenue that a corporation could hypothetically generate if it had a monopoly on its product or service. The TAM demonstrates to a prospective investor what is potentially achievable if the company can expand into all market segments through appropriate product portfolio and business model additions.

There are three ways to determine TAM

Top-down approach

The top-down strategy is taking the entire number of people in a dataset and then applying demographic and geographic filters to restrict the findings down to a market subset. It is frequently based on previously published data from market research organizations.

Example: Assume you want to start a footwear company. First, you should find out how many footwear retailers there are in India; this will help you figure out the overall market to whom you may possibly offer your goods.

According to your research, India has 50,000 footwear stores. Now let's say that you only want to sell to people in the Bangalore area out of the entire list.

Your target market is determined to include the 1,000 footwear stores in the Bangalore area. From there, you conduct research and interact with footwear distributors to conclude that footwear distribution has an approximately 40% success rate.

Using this as an example, we'd calculate the market size using the following formula:

Market Size = Target Market * Penetration Rate

1,000 footwear stores x 40% = 400 footwear stores

Then, assuming that each footwear store generates $20,000, you can calculate prospective income using the following formula:

Market Value = Market Size * Average Value

400 footwear stores x $20,000 = $8,000,000

This means you stand to make $8 million if you penetrate 40% of the total market in the Bangalore area.

However, in the top-down approach, since the information is gathered by third party sources, it may not be completely accurate.

Bottom-up approach - The mostly widely accepted approach due to it's accuracy levels

The bottom-up approach is the inverse of the top-down approach. Bottom-up TAM analysis begins with a smaller market subgroup and then extrapolates from there to get the complete population of purchasers. A bottom-up calculation is expressed in terms of revenue.

Using the same footwear example – Say you found recent data showing that the average cost of a footwear in Bangalore is $10. A survey shows that the average consumer buys one pair of shoes in 2 months, or 6 pairs a year. This means that the average consumer spends $60 per year on footwear.

Next, you discover that the number of consumers (or households) you can expect to reach in the Bangalore area is 50,000.

As a result, your market size is?60 x 50,000 = $ 30,00,000

Bottom-up TAM is based on data generated in-house by you. As a result, the final figure is more likely to be correct and applicable to your business.

Value-theory market size

The value-theory method begins by determining how much a buyer is willing to pay for a product or service based on the value it provides.

You then multiply this by the total number of people or businesses who see the same value and would prefer to use your solution over the competitors. Here are some items to consider when calculating the total available market with this method:

• How many people would get value out of your latest idea?
• How much they would be willing to pay for it?

Example: Assume you sell cycles to cycle retailers in Karnataka and produce a sort of cycle that is lighter than your competitors and has patented technology that makes it faster to ride. Your value-theory would be identified by evaluating how many bike shops would be willing to pay to carry your superior product. Would cycle stores pay $40 or even $45 for a faster cycle if conventional cycles are sold for $35?

Value theory is beneficial to businesses who have created a unique product that is establishing new markets or changing existing ones. It's a useful strategy for businesses that don't have access to market data or don't have the means to perform their own research. Value theory, on the other hand, is largely based on supposition and guessing; its results will never be completely accurate.

After you calculate your total addressable market, it’s time to determine whether it’s worth entering the industry or not.

It's important to note all the above mentioned methods ignore the existence of competitors, customer churn rate, and other factors that impact sales. TAM?or Total Available Market is the total market demand for a product or service.

Now you would like to know how much of the TAM can you actually target. That is when you arrive at SAM & SOM.

• TAM – Total Addressable Market / Total Available Market. This is the total market demand for a product and / or services.
• SAM?– Serviceable Addressable Market or Served Available Market. This is the segment of the TAM within your geographical reach that you can target with your products and / or services.
• SOM?– Serviceable Obtainable Market or Share of Market. This is the portion of SAM that you can realistically capture.

Market size assists your company in answering the following questions:

How much potential money can we generate from this market? To put it another way, is it even worth our time and effort?

Is the market large enough? Is the market expanding? Will there be possibilities to gain money from this market in three, five, or ten years?

When looking for funding, market size is an important metric to know. Investors will need to know how much money they might potentially make in a given market. Furthermore, you must determine whether the potential revenue you can generate outweighs the costs of your organisation.