Market Sizing: The Art & Science of Calculating Your Piece of the Pie
Business ideas are initially steered by a founder’s gut feeling, but at some point they will require solid evidence and research to capture the true market potential. It’s guaranteed that any standard “Entrepreneurship-101”curriculum will get you to go through the basic exercise of market sizing. Beyond speaking to potential customers and experts, doing your homework by checking your facts, figures, and stats will get your gears grounded in your market opportunities. You’re going to want to have an idea of this potential, especially if you are looking to speak to investors and raise external capital.
The art and science of market sizing gets you thinking about gigantic market opportunities and understanding how your solution narrows in and addresses your piece of that great big pie.
When it comes to billion dollar industries, even 1% of that pie is a sizeable chunk and so estimating slivers of massive markets is actually the realistic route for many startups.
If you’re banging your head on your desk wishing you didn’t have to partake in this particular exercise… tell me about it. I was just there! Don’t let this get you down.
Here’s my take on why early market sizing can be more of an art than a science and why nailing a smart approach is better than actually arriving at the perfect numbers. It’s interesting how an exercise that requires lots of digging into research and statistics still relied on a bit of my gut feeling as inputs for the math.
As I’ve learned from the experts, since markets are constantly changing, market sizing is an ongoing exercise. As a result of this exercise I created flexible market sizing models so I could easily plug my assumptions in to see the resulting market sizes.
I’d like to share the initial five-step approach (with a full on walkthrough, reasoning, and calculations) for how I landed on rough Canadian market size opportunities for Cost Canvas. While I do have ambitions to create a world-class solution, I’ve started by calculating the market size for the Canadian landscape as that is where we are currently based and I was able to easily obtain statistics from databases that I was already familiar with. If your model is B2B and you want to get a sense of where to get Canadian market data, this walkthrough will be super helpful for you — so let’s jump in!
(If you want to get a really great intro to market sizing, I recommend checking out MaRS’ online course on this very topic and this article that I used as the basis of my initial market sizing approach
For starters, while I love numbers and financial metrics, in a way I felt a little out of my element. Personally, going through this market sizing exercise felt a bit like a journey back to the land of academia. It had been a while since I visited primary and secondary sources, research databases, and scientific journals.
I was resistant to completing this exercise because for the most part it felt like I had to stitch together some statistics to get an understanding of the total market and then BS my way to an addressable market. Like many forecasting and financial projection models, it’s less about the actual numbers as it is about the approach you used to get to that number. This was beyond a typical lightning quick Google search and actually required me to gather stats and use reasoning to come up with a justifiable approach.
Step 1: Define your target customer
As mentioned in previous posts, we have developed three different target segments for Cost Canvas:
- Bootstrapping entrepreneurs
- Small-to-medium businesses
- Finance super users (i.e. advisors such as accountants and bookkeepers).
Step 2: Estimate the number of target customers
I used industry databases from Statistics Canada to get started, since my market is B2B and there are tables here on the population of businesses in Canada. I tried to go after the most recent data points that were publicly available. Here are the estimate numbers I arrived at for each of my segments (scroll down below to check my sources and math for each):
- Bootstrapper customers — 308,008
- SME customers — 374,234
- Financial Advisor customers — 157,272
Total combined customer segment: 839,514
2-a) Estimating Number of Bootstrapping Entrepreneurs
To estimate this market I used a combination of data points from Statistics Canada to narrow my market. While they provided great segmentation on how they defined the size of a business (by number of employees), I still wanted to capture the real early stage bootstrapping bunch.
I paid close attention to this table that identified the “micro-enterprise” segment of businesses with 1–4 employees (632,460 as of end of 2015):
I could’ve used this number alone, which represented the total market. However, to estimate the number that were actually in our bootstrapping segment, I found another data point from the same source that showed the types of financing SMEs use. A 2014 Statistics Canada survey found that 48.7% of SMEs did not request external financing*
*This survey was from the year prior to our segment population data point and included All SMEs at firm sizes of 1-499 employees.
So this is where my OCD kicked in ?? and the realization that the quest for perfect data was futile and at best I could stitch together the best stats available in order to estimate my market.
Total bootstrapper customers: 632,460 x 48.7% = 308,008
2-b) Estimating Number of SMEs
For this round, it was a little easier since we already had the Statistics Canada data from the micro-enterprises. We consulted the same table and decided that for this segment we would begin by addressing only a portion of the SMEs that were really considered to be on the small to medium side. We added up the segment of SMEs with 5–19 employees:
Total SME customers: 226,412 + 147,823 = 374,235
2-c) Estimating Number of Financial Advisors
Lastly we wanted to capture a segment of “finance super users” (i.e. advisors such as accountants and bookkeepers). An Industry Canada report in 2014 reported that the NAICS (North American Industry Classification System) for the professional services industry employed 642,800 workers in 2014 … with 24% in accounting, tax preparation, bookkeeping, and payroll services. Okay, legit. Let’s plug that in.
Total Financial Advisor customers: 642,800 x 24% = 157,272
Step 3: Determine your penetration rate
Here’s where most of the gut feeling estimates kick in and where you might want to branch out and create different scenarios.
“The penetration rate is a function of the nature of your product. Assume a high penetration rate if your category of product is mission-critical or mandated through regulation; assume a low penetration rate for products with a specialized purpose” — ( “How to estimate market size”, MaRs )
I estimated ranges between 1–15% for our market penetration rate that varied between each target customer segment. This is where you want to take a best guess gut approach and pivot your assumptions as you firm up your numbers and revisit your market size from time to time.
The “death-case scenario” planner in me plugged in 1% to see what that would yield. This would probably be a reasonable estimate for what my startup market penetration would yield within the first few months post-launch.
Here are the average gut feeling estimates on the market penetration for each target segment that I used:
- Bootstrapper customers — Estimate 5% market penetration
- SME customers — Estimate 8% market penetration
- Financial Advisor customers —Estimate 15% market penetration
To give you a bit of reasoning, we landed on higher market penetration rates for the small segment of financial advisors because we knew it was a market we didn’t already have to educate and according to our customer development research, they were the most likely to see the value in our product and jump at using the solution.
Step 4: Segment Sizing
Before I went into the next step of calculating our market size using volume and value, I wanted to narrow in on our segment populations even further to make these somewhat high market penetration assumptions even more justifiable.
Here’s where a few Google searches came in for me to get a sense of adoption rates on online tools and software. I did research on the following to narrow our initial market segments further:
- Micro-enterprises estimated to be using online tools and software
- Small businesses using accounting software
- Digital adoption rates and cloud accounting rates for CPAs and accountants
It was difficult to find Canadian sources, so for the most part I applied some American adoption rate sources I found and estimated similar rates to my population (again assumptions began diluting the exact science bit of market sizing even further)
After crunching down our segments from Step 2 a little further, we came to these segmented population sizes:
- Bootstrappers estimated to be using online tools and software
- (90% x 308,008) = 277,207
- SMEs estimated to be using cloud accounting software
- (82% x 374,235) = 306,873
- Financial Advisors adopting cloud accounting solutions
- (90% x 154,272) = 138,845
This narrowed our total addressable segment down to 722,925.
Step 5: Calculate the potential market size: Volume and Value
Market Volume
Market volume = Number of target customers x Penetration rate
Using the new target numbers we narrowed above and the estimated penetration rates for each, I calculated our market volume.
- Bootstrapper market volume = 277,207 x 5%
- = 13,860
- SME market volume = 306,873 x 8%
- = 24,550
- Financial advisor market volume = 138,845 x 15%
- = 20,872
Market Value
Market volume x Average value
Here’s where you take more assumptions about your pricing expectations to estimate your market value. For my model, I assumed the annual average value of each segment of customers, given that pricing would scale differently based on different users. This is definitely a section of your market sizing model that you’ll want to evaluate and monitor over time based on your pricing strategy and sales data.
Using the average values below, I generated my market value estimates:
- Bootstrapper average value = $180 estimated annual value
- SME average value = $600 estimate annual value
- Financial advisor average value = $1,000 estimated annual value
Using these and multiplying them by the market volume we calculated above, I arrived at my addressable market sizes:
- Bootstrapper addressable market
- 13,860 (market volume) x $180 (estimated annual value)
- = $2.5 Million market (rounded)
- SME addressable market
- (market volume) x $600 (estimated annual value)
- = $14.7 Million market (rounded)
- Financial advisor average value
- = $20.8 Million market (rounded)
Total Combined Addressable Market = $38 million estimated in the Canadian Market
You can see how playing around with assumptions can lift or drop these market estimates +/- a few percent. That’s why I created my market sizing model in a way that allowed me to plug and play with inputs to evaluate it on an ongoing basis. Feel free to check it out below and make your own copy to evaluate. In the tabs labelled for each of my segments, you can change my main assumptions on penetration rate and average value in the purple cells to see how the market sizes change accordingly.
Furthermore, as mentioned before this only involved estimates from an afternoon of research in Canadian databases, but if I was to repeat this exercise for the U.S. market, U.K. market, or a combined global market, my piece of the pie gets bigger and bigger.
If you feel a little less confused about market sizing than before you started reading, well done! This was a long post — so if you made it all the way to the end, thanks for sticking with me. I hope it was useful for you to see the thinking behind my initial stab at market sizing. I’m open to your feedback or comments or even commiseration on the art and science behind this seemingly arbitrary, but useful exercise of market sizing.
P.s. This article originally appeared in Cost Canvas' recently launched blog! Want to hear more about Cost Canvas? Subscribe to our newsletter below in order to get our exclusive juicy updates in your inbox!