What is a market size?

A 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).

What are the types of market size?

• Total Addressable Market (TAM) focuses on the size of the total market. Who can actually buy my product/services.
• Serviceable Addressable Market (SAM) focuses on the segment applicable for your tech or service. Who are qualified to buy your product/services.
• Serviceable Obtainable Market (SOM) focuses on the market subsegment that you could realistically reach given limitations like location, competition, sales channels, team capacity, etc. Core market.

How to calculate market size

There are 2 ways to calculate the estimate of your market size; bottom-up or top-down.

1. Top-Down Market Sizing: Find existing data from research reports or 3rd party data sources like Statista, Forrester, Gartner etc.
2. Bottom-Up Market Sizing: Finding your market size by customer segment - where you define the average annual revenue you could make from your product/service by estimating the number of customers and how often they will purchase in a year - then simply doing the math.

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:

• A deeper understanding of your potential buyer
• A breakdown of who is in your Minimum Viable Segment or beachhead market
• An idea of what your customer is worth
• An estimate of how many customers of a certain segment there are
• Knowledge of how you could realistically reach them
• An idea of how you will expand to drive growth

Why is it important to calculate your market size?

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.

Example for the purposes of raising Venture Capital money

1. You want to raise $1m in return for 20% of your company.
2. Investors look for 10x return so, will need to get back $10m from the $1m they put in. Company value therefore needs to be: 10/20% = $50m
3. Valuation method: Revenue or earnings multiple. We’ll use a 5x revenue multiple as our valuation method (ave. is 2x - 10x depending on type of business). So, to get to a $50m valuation we need $10m.
4. Is there enough of a market for me to get $10m in sales in the next 5-7 years?

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.

TL;DR of Market Sizing steps

1. Step 1: How big is the market or industry? (and as many market statistics as you can find) Top-down → Desktop research → Reports [Population of users/companies who will buy your product]
2. Step 2: How many people/businesses do the activity your product solves for? [Population of users/companies who will buy your product] → Bottom-up → Survey
3. Step 3: How often do the activity your product solves for? [Annual purchase frequency]
4. Step 4: How many experience pain point when doing the activity your problem solves for [Potential (%) of market you can capture]
5. Step 5: How much would they pay to solve the problem your product solves? Or, how much are they currently paying? [Dealsize (price)]
6. Step 6: Add it all together: Population of users/companies x Annual purchase frequency x Potential (%) of market you can capture x Dealsize = Revenue

How to calculate market size: Top-Down method

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:

1. {market} industry
2. {market} segment
3. {market} size/sizing
4. {market} market or market segment

Sources that contain market

1. marketresearch.com - 250k reports
2. hoovers.com - cover 1,000 industries
3. Statista.com - Platform contains more than 1,000,000 statistics on more than 80,000 topics from more than 22,500 sources and 170 different industries
4. https://www.globenewswire.com/

Hacks for when the data you need can only be accessed by buying the report

1. When Googling, always click on the image for more visual info. A lot of great info in the graphs that might only be available in the paid reports.
2. Look at the report’s backlinks. They will often reference the key stats from the report.
3. Click on news in Google and see the stats that media articles quote about the reports.

How to calculate market size: Bottom-Up method & formula

Population of users/companies who will buy your product x Annual purchase frequency x Potential (%) of market you can capture x Dealsize = Revenue

1. Population of users/companies who will buy your product - The audience who make up your potential buyer
2. Annual purchase frequency - On average, how many times will a customer purchase from you in a year
3. Potential (%) of market you can capture - Market share
4. Dealsize (price) - The average price your customer pays for your product per your business model
   

Let’s break these down:

Population of users/companies who will buy your product

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.

Objective: Estimate total market demand

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

1. Surveying the market or your potential customer (see question examples below)
2. Using social listening tools or scanning social media to see how frequently people speak about the problem. The search feature on Reddit, Twitter, Quora, LinkedIn can all be used here
3. Analysing search traffic that asks about the problem (Ubersuggest, SEMrush, Ahrefs)
4. Traffic, purchase or review data on ecommerce platforms: Shopify stores, Amazon, Takealot, Jumia etc. The number of reviews for a product are typically 10% of the number of purchases made → Reviews x10 for #purchases.

Download our free market research tools database for more tools to discover market demand.

Market segment identification survey

Use one or multiple of these survey question frameworks to identify what portion of the people you survey could be your customer:

1. Do you ever >INSERT BEHAVIOUR YOUR PRODUCT SOLVES<?
2. How many times in the last [time frame] did you do/look to >INSERT BEHAVIOUR YOUR PRODUCT SOLVES<?
3. How often do you use/do >INSERT PAINPOINT YOUR PRODUCT SOLVES<
4. Please rate the severity of how much you find >INSERT BEHAVIOUR YOUR PRODUCT SOLVES< to be an issue
5. How much do you currently pay to (or to do) >INSERT BEHAVIOUR YOUR PRODUCT SOLVES<
6. How much would you pay to solve >INSERT BEHAVIOUR YOUR PRODUCT SOLVES<
7. How likely are you to buy >INSERT YOUR PRODUCT<

Sampling: Make sure they can buy

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

1. Do they have the budget to be your customer?
2. Do they have the decision-making power to be your customer?
3. Are they regulatory barriers preventing them from being your customer?
4. Are they contractually able to switch providers?

Check out an article we wrote about finding information here which shows you how to use Apollo.

Forecasting the size of the market

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

1. Survey the change in behaviour
2. Increase in social media mentions regarding the behaviour
3. Increase in search traffic on Google
   

This one requires a bit of dreaming and vision.

Annual purchase frequency

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

1. Ask your audience how often they do the behaviour that your product solves
2. Analyse competitors and find out their purchase frequency
3. Calculate or discover how many events there are in a year that will drive your product to be purchased (E.g. Christmas, funerals, sunny days, burglaries etc.)

Potential (%) of market you can capture

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:

1. Proportion of the market the views existing solutions as sub-standard
2. “Early adopter” attitude of market. Is it an old school or younger, more adventurous market

This only applies to your SAM and SOM.

Dealsize (Price)

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

1. Van Westendorp Pricing survey
2. A price relative to your competitors
3. A price discovery survey that uncovers how much people would be willing to pay to solve the problem you solve
4. Cost + profit margin target

Example: Remittance payment startup for foreign nationals in South Africa

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.

Summary of steps

1. Step 1: How big is the remittance market in South Africa? How many African foreign nationals are living in South Africa? [Population of users/companies who will buy your product] → Top-down → Reports
2. Step 2: How many Zimbabweans and foreign nationals send money from SA back to family [Population of users/companies who will buy your product]  → Bottom-up → Survey
3. Step 3: How often do they send money back to a family member [Annual purchase frequency]
4. Step 4: How many experience pain point when doing it (rate how hard or easy it is to send money back to family) [Potential (%) of market you can capture]‍
5. Step 5: How much would they be willing to spend if they are interested? Or, how much are they currently paying? [Dealsize (price)]
6. Step 6: Calculate TAM, SAM, SOM

Market research questions: Go-to-market, Marketing, Positioning etc.

1. What are their pain points when sending money back?
2. What remittance products or methods do they currently use to send money back
3. How likely would they use your remittance product?

Part A: Top-down market size desktop research

Step 1: Size of market, population and all helpful info

[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?

Findings

• AVERAGE PRICE OF REMITTANCES TO SEND 200 USD → 14.44% (Remitscope)
• Volume of remittances: USD 921 million

• Zim: 773,246 (Zimbabwe National Statistics agency)
• Total foreign nationals: 3.95m (Source: StatsSA)
• Zim (24%), Mozambique (12%), Lesotho (7%), Malawi (3%), UK (2%), Congo (2%) (Source: Migration Policy & UN Population Division)

Notes:

There is contradicting data on:

1. The number of foreign nationals living in SA. Some say the figure is closer to 10m (not 3.95m)
2. How many foreign nationals from each country there are: 24% vs 14% from Zim

This is why doing your own bottom-up research is NB - to get your own set of facts!

Part B: Bottom-up market sizing using a survey

Step 2: How many Zimbabweans and foreign nationals send money from SA back to family

[Population of users/companies who will buy your product] → Bottom-up → Survey

Do you send money back to {{home country}}?

1. Yes
2. No

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.

Result:

• 90% of foreign nationals surveyed send money back to their home country
• 95% of Zimbabweans surveyed send money back to their home country

Step 3: How often do they send money back to a family member

[Annual purchase frequency]

On average, How many times a year do you send money back to your family in {{home country}}?

1. 1-2 times
2. 3-4 times
3. 5-6 times
4. 7-9 times
5. 10-12 times
6. 13+ times

Result:

• 45% send money 10 - 12 times a year (average = 9 times)
• 50% of Zimbabweans send money 10 - 12 times a year (average = 10 times)

Step 4: How many use digital payment method? How many experience pain point when doing it (rate how hard/easy it is to send money back to family)

[Potential (%) of market you can capture]

How do you send money back to {{home country}}?

1. Pay someone to deliver cash
2. Digital method (Mukuru, Mama Money, World Remit etc.)
   

Rate how easy it is to send money back to {{home country}}

1 - Very hard & 5 - Very easy

Result:

• 80% of overall send money back digitally
• 70% of Zimbabweans send money back digitally
• 29% find it Hard (4) or Very hard (5) to send money back to their home countries
• 38% of Zimbabweans find it Hard (4) or Very hard (5) to send money back to Zim

Step 5: How much would they be willing to spend if they are interested? Or, how much are they currently paying?

[Dealsize (price)]

On average, how much money do you to send at a time to {{home country}}?

1. R1 - R999
2. R1,000 - R1,999
3. R2,000 - R2,999
4. R3,000 - R3,999
5. R4,000 - R4,999
6. R5,000+
   

On average, what is the transaction fee % to send money to {{home country}}?

1. 1% - 3%
2. 4% - 6%
3. 7% - 9%
4. 10% - 12%
5. 13% - 15%
6. 16%+
   

Assumptions:

• Only for foreign nationals sending money digitally
• The amount they send home is roughly the same

Result:

• 16% transaction fee to send money back to home countries
• 12% transaction fee to send money back to Zimbabwe
• R1,400 average amount sent back to their home countries at a time
• R1,100 average amount sent back to Zimbabwe at a time

Extra Step: Market research questions: Go-to-market, Marketing, Positioning etc.

1. Details around how they send money back to home country physically:
2. Competitor research: Which digital company do they use? (Mukuru, Mama Money, World Remit etc.)
3. What are their pain points when sending money back? (Cost, time, accessing cash in home country,
4. How likely would they use your remittance product?

Step 6: Adding it all together

Population of users/companies who will buy your product x Annual purchase frequency x Potential (%) of market you can capture x Dealsize = Revenue

Market size calculations

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

FAQ

How much of a market can a new business get?

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.

What is an example of a target market?

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.

What's a good market size?

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.