The Method of Sizing Market: How To Know The Maximum Revenue For Your Product
Kundan Sarraf
I am a jeweler turned deep tech entrepreneur solving the problem of counterfeiting and traceability in the gems and the jewelry trade.
What is "Market Size"?
The term "market size" is a total number in any currency that spots a segment in a category and explains its higher limit for taking in or giving out the items within a time bracket for a selected price rate under a regular sentiment.
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In another sense, "market size" is a financial figure quoting your business and products’ highest possible revenue.
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Let’s understand gradually, through some examples:
Here, the examples are helping you to realize the category, the segment in it, and the higher limit of the segment.
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The next step is quoting a price for a unit that you anticipate each number in the limit would be ready for taking in. Pricing is a different subject; I am leaving it for another write. But, for knowledge's sake, product ideation, pricing, and market sizing are interwoven and thus should be revised simultaneously.
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Let’s suppose I charge $10 for an item that I produce. And I am allocating an item to each number in the limit to draw the size for the respective market:
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Now let’s define the product:
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(*) Now let’s recalculate the market size for a year:
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I hope you understood the idea of calculating the Market Size. It’s very simple, right?
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Wait… the answer of $1,200,000 for 1,000 companies serving businesses is fishy! This is why I am writing this article and will share how I calculated the market size for the SaaS that I will be offering.
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I am marking this part of the blog with (*) to return here after a while to realize what we missed.
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What are the different types of Market Sizes?
You may level the market size under the following commonly used categories, considering the features and functions of your product and your present strength to produce, operate, and compete.
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Total Addressable Market (TAM): This refers to the total limit of the segment and other similar segments where your product could broadly fit. For example, there are ten million dogs in the world, and you will require separate languages on the covers to sell, but biscuits are the same.
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Serviceable Available Market (SAM): This refers to the limit from TAM that suits your product’s present condition but is not accessible due to your operation or some feature. For example, in the United States, there are 100,000 dogs, but your optimum production capacity is 10,000 packets of biscuits.
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And Serviceable Obtainable Market (SOM): This is the limit from SAM that is very much real and achievable for you with your product’s present condition, competition, and consumer sentiment. E.g., 150 dogs out of 500 in a city that has another two dog food producers.
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Why is it needed?
Running an enterprise is a 2+2=5 math. Market sizing helps you understand the potential of your product and business, which can lead to making an informed decision while assessing opportunities and strategizing the business. And, in my case, to find a rational answer for whether intensive and costly research and product development would be commercially viable.
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For example, in the above situation, you will be producing 1000 packets less than your capacity. To tap that leak, you might decide to scale to other cities or here, which would require you to increase your production or make changes in your product or business model to overcome competition.
How deep can you sub-segment the Market Size?
In a case where you are starting or planning to start a venture or launch, you shall further divide the SOM into five sub-segments.
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True believers are those consumers who believe in your vision and stand like team members. In fact, they go the extra mile to promote and defend you and your product in the market. It is difficult to quantify the size of this sub-segment because it is a more emotional-attachment-based decision than a need-based one. However, describing your early social media and physical engagement might help you to get a vibe.
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Early adopters: These are the ones who are free from influences. They read, assess, and then make informed decisions. On the other hand, considering the product you are offering, they may have special needs that make them the first in line to purchase it. They are those who are ready to adjust to bugs in your product and wait for you to solve them.
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Early Majority: These are the ones who look for a much more stable and pristine product in the market. They want to purchase your product in the first place, but they distance themselves from being early adopters since they don't know whether you will continue or not.
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Late Majority: These are the ones who prefer to opt for a product only when it is stable and widely accepted in the market.
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Late Minority: These are the ones who are not very concerned about the benefit or value that your product can bring to their lives. But, still, they could be your customer because of external elements, such as attractive marketing, a compelling sales pitch, a strong recommendation from someone very known to them, etc.
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Getting an exact count of the above sub-segments would be overwhelming. You might need to interact on an individual level to first list the identifiers and then mark each customer for a particular sub-segment or average. I passed through this stage, but it wasn’t overwhelming to me since I used to be a gem and jewelry wholesaler.
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I was able to mark each of them based on their publicly available data and touchpoints, like websites, brochures, sales invoices, etc.
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The analysis of the market for the above sub-segment will help you understand the health of the market that you are planning to hit. If you are selling something in a place where the ratio of early adapters is higher, you will be flying with your product.
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In a startup discussion event, a speaker spoke about his failure. He developed an app that was better than the A app, but he couldn’t generate revenue as much as the A app did, even after effectively marketing. The A app he was talking about was served in San Francisco.
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What is the role of future features of the product in sizing the market?
To have a realistic picture of the market size (TAM, SAM, AND SOM), your clarity for the market requirement and strategy to introduce features and advancements that address those requirements play a vital role. The more you know about consumers and their personas, the better you can list and prioritize the features and functions and eventually draft the full-proof “Market Size Brief”.
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What is the usual mistake when calculating market size?
Though I seldom had the chance to read others' business plans or pitches, I often got into VC seminars and discussions.
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Getting confused with the market size of the industry that you are serving with what should be yours is a common mistake the freshers make.
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Let's take an example: the industry that I am targeting as my customer is gems and jewelry, and what I am serving is software, not gems and jewelry. So, the market size of gems and jewelry, which is more than 100 billion dollars globally, is not my market size. Rather, a portion of the Enterprise application users is my market size.
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That is why it is very important to have clarity about the components of the market size to calculate your product.
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Let’s go up (*). No, where I had quoted the Figure 10 users prior to the calculation. I mentioned only 1000 companies. 10 Users were helicopter figures that landed while calculating.
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It’s true that the higher limit for the segment, companies servicing businesses, is 1000 companies x 10 users in each company = 10,000, ?in the case 10 users per company is real or rational.
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This means you must be very analytical while determining the higher limits and segments to get a dependable figure. How you average 10 users for each company is the question that you must answer before using them to calculate the Market Size.
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How did I calculate the market size for my purpose?
Let's suppose I have two products to offer: an enterprise application and gems 3D photography. At the very initial stage of ideation, I compared the pricing of similar enterprise applications and found a range of $10–40 per user per month.
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On the other side, I appreciate the pricing strategy of charging 0.1% of the value of gems for photography and delivery.
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Enterprise applications and gem photography can be sold around the world with primitive features, so TAM based on this definition would be a matter of scale and competition.
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What really differentiated TAM from SAM for me is a segment of the gem industry dealing more in rough crystals than in cut and polished gems. I need additional features and functions to tap this market.
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Now, either I can list it as a separate market and product, or I can design a progressive strategy. Since the features and functions that were required to tap this market were an addition, it was healthy for me to select a progressive approach, which gave me an understanding of TAM, finally.
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At this point, I achieved clarity for segment, pricing, and the difference between TAM and SAM for me. Now I needed the higher limit of the segments to multiply for the financial number for the TAM and SAM.
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Sizing the market is both science and art. I knew how gems and jewelry retailers, wholesalers, and manufacturers work. I knew the number of people required to produce and sell an item.
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So, with the help of my experience, I averaged to complete the equation: to produce and sell X value of gems and jewelry, Y number of people will be required. Let's suppose it will require 10 people for $100,000; that makes $10,000 for each person.
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Now comes the final magic: discovering the real higher limit and multiplying it with the pricing.
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I used the tool “Trade Statistics for International Business Development” available at https://www.trademap.org/ to get the real data, HSN-wise for countries and the world in total, for total exports for the last five years. With this, I found the growth rate too.
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Suppose the total gem and jewelry exports of the world were $500 billion.
So, for photography, my SAM stood at $500 billion x 0.1% = $ 500 million (a1).
And for enterprise applications: ($500 billion / 10,000) x $20 x 12 = $12 billion (b1).
Thus, my total SAM turned out to be: a1 + b1 = 12.5 billion dollars.
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Again, with the help of the market map, I got the figure for total rough crystal exports, let’s suppose $200 billion.
So, the photography for this segment turns out to be: $200 billion x 0.1% = $200 million (a2).
And for enterprise applications ($200B / 10,000) x $20 x 12 = $4.8 billion (b2).
Thus, my partial TAM, since I am tapping this segment in a later part of my journey, is a2 + b2 = $ 5 billion.
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So finally, my TAM is (a1+b1+a2+b2): $17.5 billion, and my SAM is (a1+b1): 12.5 billion dollars.
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Regarding identifying my SOM, I must practically realize my production or deployment strength, whether it caters to a country, city, or region, then a figure could be derived accordingly.
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On the other hand, I used my experience again to understand the purchasing personas of the entities in the market.
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I had the knowledge of the required quantity of inventory—gems and jewelry—in a store: small, medium, big, and large. Thus together, I was able to average and sort the ratios for early adopters, early majorities, late majorities, and late minorities for a given sample city and, eventually, the country.
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I got the total number of registered jewelers from a government body in a phone call.
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I drew a table in which
Eventually, by totaling the ‘D’ column, I got the total market size for a given space based on purchasing persona. i.e., Early adaptors, Early Majority, Late Majority, and Late Minority.
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Each of us knows, “The higher the risk, the higher the profit." But sometimes, the cost of innovation is higher than usual, and it will be devastating if you find the market is comparatively smaller.
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The results I arrived at from the above methodology are very raw, but they were enough for me and anyone to realize the basic higher limit of the horizon so we can make an informed decision to start intensive research for product development that requires a huge chunk of money and does have the risk of failing.
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My past occupation of making jewelry and selling it and gems for 10–15 years formed the basis of my extensive market research for my present endeavor.
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Thank you! Please leave your comments or ask questions related to your market sizing.