Market Sizing – Overview
In my classes, I emphasize that market sizing is a skill that can be useful regardless of whether you are an entrepreneur or whether you are working at a large company in just about any industry. It spans job and team functions including R&D, new product development, marketing, strategy and finance.
In general, the purpose of attempting to size a market is to get a better idea regarding the overall size of the opportunity in dollars and ultimately to distill that opportunity into revenue potential. This allows you to compare competing projects and ideas.
By the way, the exercise of market analysis isn’t just about checking that box because investors or board members want to see it in the presentation. It is an important learning tool that should help you refine and improve your concept.
My feeling is that market sizing has four distinct steps:
1. TAM – Figure out the size of the total available market. You are seeking hard revenue numbers, growth rates and people numbers.
2. Top Down Analysis – Take the TAM and see what kinds of segmentation make sense. Think about each segment in terms of adoption rates. You can get to a revenue number this way, but don’t get too excited.
3. Bottom Up – Using the same segments as in Top Down, think about how much product you can actually sell and what you think your customer(s) are willing to pay. You can get to a revenue number this way, but don’t get too depressed.
4. Reconcile your numbers.
By the way, know that you can’t possibly know. But again, this is an exercise to help you build a better product, to help you compare ideas and potentially to help investors or corporate higher-ups get excited about your ideas. Treat it as such.
I will be adding blog posts in the coming weeks about specifically how to do each of the 4 steps.