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.
FAQ
What is market sizing?
Market sizing is the process of estimating the potential of a market for a product or service. It's crucial for identifying the opportunity size, setting realistic business goals, and attracting investors.
What are the key components of market sizing?
- Total Addressable Market (TAM): The total demand for a product or service across a market.
- Serviceable Available Market (SAM): The portion of TAM that is within your product's geographical reach and targeted by your services.
- Serviceable Obtainable Market (SOM): The segment of SAM that your business realistically aims to capture in the short to medium term.
How do you perform a top-down approach in market sizing?
The top-down approach starts by identifying the global market size from industry reports, then segments this figure by applying the percentage that represents your target demographic or region to find the SAM. The SOM is then estimated by assessing the market share you expect to capture based on competitive analysis and your business's unique value.
What is a bottom-up approach in market sizing?
This method involves calculating the market size based on the pricing of your product and the potential customer base. It requires detailed data on customer demographics, pricing strategies, and potential annual revenue per user (ARPU) to estimate the total market size.
What are the advantages and disadvantages of using the top-down vs. bottom-up approach?
- Top-Down: Quick and requires fewer resources but can be too generic and inaccurate.
- Bottom-Up: Provides a more accurate market view but is resource-intensive and time-consuming.
Why is it beneficial to use both top-down and bottom-up approaches?
Using both methods offers a comprehensive understanding of your market potential. The top-down method gives a macro perspective, while the bottom-up approach provides details on achievable targets. Comparing both can highlight discrepancies and refine estimates.
How can market sizing attract investors?
A well-researched market size demonstrates to investors that you understand the market's potential and your business's position within it, which is crucial for their evaluation criteria.
What tools can assist in conducting market sizing?
Digital tools like Miro and Notion offer templates and boards that guide through the process of defining TAM, SAM, and SOM, aiding in a structured approach to market sizing.
Where can I see examples of market sizing in action?
You can view detailed examples and templates for both top-down and bottom-up market sizing at our Miroverse page here: Market Sizing for Startups Template.
How does understanding market sizing benefit a startup?
It helps startups gauge the market's potential, guides strategic planning, enhances product development, informs marketing tactics, and is crucial for scaling business operations effectively.
