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Privacy PolicyA market size is typically defined as an estimate of the number of buyers of a particular product or users of a service. However, this often does not factor in the value of the buyers/users. We’ll define a market size as how much revenue you can get from a defined segment (people and/or businesses). Basically, those who could purchase your product or services (which is normally defined annually).
There are 2 ways to calculate the estimate of your market size; bottom-up or top-down.
In most cases, it’s best to use both a top-down and bottom-up approach to estimate your market size. Once you have done this, you can either present them as individual points of data or combine them and reach an overall average.
However, we recommend prioritising and spending a lot more time on the bottom-up approach. This is because bottom-up gives you:
Calculating your market size shows you the size that your company could grow to. It is a very important exercise because it can show you whether the business idea you’re going after is one that has the potential to be a $1bn business or one that might only be big enough for 1 salary.
In short, market sizing is primarily used to determine a business' feasibility, specifically go/no-go decisions. Plus, you come away with key marketing decisions, pricing for your product or service and go to market strategy. The amount of operational and technological capabilities needed to serve the expected market is also provided as a preliminary estimate.
Bottom-down market-sizing looks at the macro view of the industry or market. It typically just means using market and industry figures produced by other 3rd party market research companies. E.g. the size of the beverage industry in Africa. It is often easier to find industry statistics than it is statistics for your actual market. Market and industry size numbers are often locked up in reports that cost thousands of Dollars like this Remittance report by Grand View Research which costs $5,950. However, there are a few tricks and techniques you can use to get these numbers without buying the report.
Here are some helpful techniques and sources to make your market sizing desktop research more effective and efficient:
Keywords to use in a Google search to find your market size:
Sources that contain market
Population of users/companies who will buy your product x Annual purchase frequency x Potential (%) of market you can capture x Dealsize = Revenue
Let’s break these down:
Defining your audience is the most important step in your entire market sizing exercise. If done properly, it will give you a clear picture of how many people customers you could acquire in different segments.
How many people experience the pain-point that your problem solves?
How many people exhibit the behaviour that is necessary for your customer to exhibit to be sold to them?
Which segment is most prepared to pay for solving the problem?
Would people be interested in your product?
Market research techniques to uncover this
Download our free market research tools database for more tools to discover market demand.
Use one or multiple of these survey question frameworks to identify what portion of the people you survey could be your customer:
Another important aspect to consider is whether your target audience can realistically purchase your product or replace their existing behaviour. For example, they may experience the pain point of needing a new cell phone (your product) but are currently stuck in the first year of a 2-year contract with a network provider. You may have thought you had a buyer in this case, when actually, they may not be able to afford the new cell phone. This can also be seen in situations where your buyer doesn’t have the autonomy or authorisation to make a purchase - such as an employee who struggles to use the old copy machine but doesn’t get to decide that the company should purchase a new one. Hypothetically, you have a buyer but in reality, they’re non-existent (or better put, unavailable).
Key questions
Check out an article we wrote about finding information here which shows you how to use Apollo.
How many people will change their behaviour to become part of your market? This could mean that you are predicting an adoption of a new behaviour.
Example: Uber
Early on, their market might be though of as taxi riders. In reality, many public transport takers and car owners ended up using Uber instead of public transport or their car.
Methods to calculate
This one requires a bit of dreaming and vision.
On average, how many times will a customer purchase from you in a year? Due to the rise of Saas (Software as a Service) businesses charging a monthly subscription, this market size factor is often forgotten about in articles. The purchase frequency is one of the greatest drivers of the multiple you use to value your business. It may be due to your business model (license fee) or it may be due to the way consumers interact with the product category. Is it a monthly recurring Saas, a once of installation purchase or an annual Christmas present purchase?
Methods to calculate
If you were very thorough in your audience defining, you might want to assume that everyone in your audience could be a customer. But more likely than not, you will not be able to penetrate the entire market. Some of the considerations for determining the potential of your market:
This only applies to your SAM and SOM.
Determining the dealsize or price depends on the type of business you’re in. It’s based on a combination of Supply or internally-driven reasons (costs, inputs & funding) and Demand or externally-driven(market value and price consumers are willing to pay).
Methods to calculate
To practically demonstrate how to do this, we've created a fictional scenario for a startup that is building a remittance product that allows foreign nationals in South Africa to send money back to their home countries. This startup has decided that Zimbabweans in SA will be its beachhead market and so it will specifically research Zimbabweans on top of all foreign nationals.
Note: All the survey response data that is included here is made up and just used for demonstrative purposes.
Market research questions: Go-to-market, Marketing, Positioning etc.
[Population of users/companies who will buy your product] → Top-down → Reports
How big is the remittance market in South Africa?
How many African foreign nationals are living in South Africa?
There is contradicting data on:
This is why doing your own bottom-up research is NB - to get your own set of facts!
[Population of users/companies who will buy your product] → Bottom-up → Survey
Do you send money back to {{home country}}?
Note: Crucial that you survey a representative sample of Zimbabweans to be able to confidently extrapolate on the full population. A distribution of location, income, job type, gender that mimics the distribution of Zimbabweans in South Africa.
[Annual purchase frequency]
On average, How many times a year do you send money back to your family in {{home country}}?
[Potential (%) of market you can capture]
How do you send money back to {{home country}}?
Rate how easy it is to send money back to {{home country}}
1 - Very hard & 5 - Very easy
[Dealsize (price)]
On average, how much money do you to send at a time to {{home country}}?
On average, what is the transaction fee % to send money to {{home country}}?
Assumptions:
Extra Step: Market research questions: Go-to-market, Marketing, Positioning etc.
Population of users/companies who will buy your product x Annual purchase frequency x Potential (%) of market you can capture x Dealsize = Revenue
TAM (Foreign nationals sending money back)
[Foreign national population in SA x % Send money back to home country] x [Send per year] x [Ave. Rand amount sent x Transaction fee ave.]
[3.95m x 90%] x [9] x [R1,400 x 16%] = R7.167b
SAM (Zimbabweans sending money back digitally)
[Zimbabwe population in SA x % Send money back to home country] x [Send per year] x [Ave. Rand amount sent x Transaction fee ave.] x [% Use digital remittance method]
[770k x 95%] x [10] x [R1,100 x 12%] x [70%] = R676m
SOM (Zimbabweans currently unhappy with existing solutions)
[Zimbabwe population in SA x % Send money back to home country] x [Send per year] x [Ave. Rand amount sent x Transaction fee ave.] x [% Use digital remittance method x % Find sending back hard]
[770k x 95%] x [10] x [R1,100 x 12%] x [70% x 38%] = R257m
As a startup or small business with realistic expectations, you understand that you will never have a 100% market share (even the largest, most established businesses never do). So, how much of the market can you get right away?
Most startups and small businesses can expect to gain access to 1% to 5% of their target market at first.
A target market is more specific than your TAM or SAM. A SOM can sometimes be your target market—like the example above. Our SOM was “Zimbabweans currently unhappy with existing solutions who send money back digitally”. We narrowed the audience down based on: Nationality, Spending behaviour, Feeling towards existing solutions.
Market Opportunity is an important metric for estimating a startup's long-term potential. Venture capitalists typically invest in companies that are going after market sizes of at least $100M. A market of that size can support a company worth $25 million or more. Because many early-stage companies are entering new markets, determining overall market size is difficult. However, if you follow the steps outlined above, you should be able to arrive at a reasonably accurate figure.
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