how do you determine market size for a business plan

Market Size: The Two Best Methods for Market Sizing Your Business, Plus Expert Tips

Updated: September 20, 2024

Published: April 10, 2019

When considering a new venture, you must understand: “What is market size?” More specifically, you need to know your venture’s potential market size. But “Why?” I hear you ask.

Picture this: You’ve put in months of hard work only to realize that 100 people in the U.S. will potentially buy your product.

The potential revenue from that population size may be worth your product's manufacturing, production, and distribution costs — or it may not.

But even if you’ve got 10,000 potential customers, you still need to go deeper in your market sizing to understand whether there’s a viable market.

Below, I’ll share methods to calculate your market size and accurately measure your business’ revenue potential.

I will also share first-hand experiences from founders, CEOs, entrepreneurs, and more who spoke to me about their market sizing journeys.

Keep reading, or jump to the section you’re looking for:

What is market sizing?

Why is market size important, market size vs. market value, market sizing terms to know, how to calculate market size, market sizing methods, market size: faqs.

Market sizing is the process of finding how big your product's audience or revenue could be. So, market size is the total number of potential buyers for a product or service and the potential revenue reach based on that population size.

When market sizing, you're calculating customer numbers to measure the growth potential of your business.

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There are several reasons why every business should spend time sizing its market:

• Market sizing helps you determine whether your product is a worthy investment. The latest data from the U.S. Bureau of Labor Statistics (BLS) finds that 23.2% of private sector businesses in the U.S. fail within the first year. Businesses fail for many reasons — however, miscalculating product demand (or not calculating it at all) is one of them.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners and investors.

Real-world example:

“We first identified who fits into our target market so we could figure out an ideal market size,” says Michael Nemeroff , CEO and co-founder of apparel eCommerce brand Rush Order Tees .

Nemeroff says the brand considered business leaders, schools, sports teams, and event organizers their primary targets because they create customized apparel and other products. Because the team operates virtually, that market can extend as far as shipping is availability.

“The biggest challenge was accounting for differences across regions because of population density, event frequency, business hubs, etc.,” Nemeroff adds: “It’s a bit of a guessing game, but you’re making educated guesses that help you understand the viability of your idea and start planning your budget.”

According to Nemeroff, “it would be terrible to overshoot your market size considerably then overspend on a market where the juice isn’t worth the squeeze.”

• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and its needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set realistic goals, assign resources, and refine your strategies.

“Skipping market sizing can lead to costly mistakes,” says Logan Mallory , vice president of marketing at Motivosity , an employee recognition and rewards platform.

“Early in my career, I was a part of a startup that did not prioritize market sizing. We anticipated that our product would appeal to a large number of people, so we spread our marketing efforts excessively thin.”

Mallory continues, “As a result, we wasted resources on low-conversion areas while passing up more lucrative prospects. If we had done comprehensive market sizing, we could have identified and targeted high-potential sectors from the outset, maximizing our budget and generating faster growth . ”

• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to a company or industry's financial worth or estimated market capitalization. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Before figuring out your market size, there are a few helpful terms you should get to know.

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base a company could achieve if it captures 100% of its market share.

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company's resources, capabilities, and target customers.

Serviceable Obtainable Market (SOM)

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

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There are two simple methods for market sizing your business. These processes can help you use data to gauge market size.

Top Down Approach

The first is a top-down approach, in which you start by looking at the market as a whole and then refine it to get an accurate market size. That would look like starting from your total addressable market and filtering from there.

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How to effectively determine your market size.

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One of the most crucial tasks an entrepreneur has is to calculate the size of their market, and the potential value that market has for their startup business. Without this data you can’t create a viable business plan, or be taken seriously when approaching potential investors.

As described in my book, The Art of Startup Fundraising , the market needs to be in the billions. Otherwise, even if you have the perfect team and product the returns will be limited for potential investors making your investment opportunity less attractive.

Market Size for Startups

Determining the market size is critical. It tells you and your partners, team and investors how much potential business is really out there. It helps calculate how much value there really is for your individual venture. This is critical to know, even if you never plan to raise a dime in outside capital.

Market size becomes far more important if you ever need to raise funding for your business. It is one of the most basic digits every potential angel and VC investor is going to expect. Even your friends and family should be asking about it during seed and pre-seed financing rounds. Coming up empty handed is going to destroy your credibility instantly.

Unfortunately, this is one factor which entrepreneurs frequently blow when formulating initial plans, stepping out into a new business and when pitching investors. So, how do you do it right?

How to Determine Market Size

To calculate your market size, you’ll either be looking for data on the number of potential customer, or number of transactions each year.

For example; if you are selling toothbrushes, virtually everyone can be counted in your big whole market figure. If people are listening to their dentists, and they are purchasing new toothbrushes 2-4 times per year, that number is even larger. If you are selling houses, then there may only be an average of 5.34M transactions in a good year, in the entire United States.

The Art of Startup Fundraising book

Keep in mind:  

• Show projections going out 3 years (it’s hard to accurately analyze after that)
• Account for organic growth or decline in the years ahead
• Your roll out to geographic areas over time

There are a variety of ways to acquire this data. Census and labor bureau hold a lot of information, and most industries have formal associations which compile and track this type of data. You can also commission your own research or purchase studies.

Once you have the data you want to make sure that you are presenting it in a powerful way in your pitch deck since it is one of the most important slides. A good pitch deck template is the one created by Silicon Valley legend, Peter Thiel ( see it here ) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Thiel actually includes not one, but two slides around the market and its size. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M ( see it here ).

Below is another example of how to show in your pitch deck your market growing over time.

How to Determine Market Value

Market size, or the number of potential customers or unit sales is one thing. How much that is worth, is a completely different, and perhaps more important figure.

You need to know how much revenue that market has to offer. For example; UpNest is one of the fastest growing real estate tech startups, which helps home buyers and sellers save on Realtor commissions. If the average home price is $394,300, and there are 5M sales per year, and the average Realtor commission is 5% of the sales price, and 90% of users use a Realtor, UpNest is in an $88.7B per year industry. Or has a market size of $88.7B.

Determining Total Addressable Market (TAM)

Realistically, no startup should or can expect to gain 100% market share. Trying to capture an entire market, without first targeting several niches, price points, customer sizes or geo areas for roll out, is going to be financial suicide for the vast majority of entrepreneurs.

For example; even giant online real estate firm Zillow, which dominates the marketplace, has far more modest estimates for its own new venture in buying and flipping houses directly with consumers. The company’s CEO recently said that if it could acquire 275,000 units a $3,500 profit each, it would be doing very well. That’s about $1B a year from just one extra revenue stream, at just over 18% of the available market share.

Of course, most new startups can’t expect to even command that much market share. Even if you could, most seasoned investors won’t believe it until you prove it. Tx Zhuo of Karlin Ventures says “If it’s 1 to 5 percent of the pie, you have a realistic plan.”

If you have no idea what’s a reasonable amount of market share in your industry, Projection Hub says one hack is to anonymously call around to all of your local competitors and find out how much volume they are doing. Then estimate you’ll be doing a fraction of that as you gain traction.

Also factor in the static versus evolving marketplace. Do population growth rates mean there will be more prospective customers in your market in 5 years, or less? Don’t forget to factor in your own impact on the market.

For example; if you were Amazon a decade ago, you should have factored in the fact that you are about to destroy the marketplace for regular bookstores. Their price cutting also slashed the value of the market in a huge way.

Early stage startup investor at Matrix Partners, Jared Sleeper notes there are actually :three distinct ways to calculate TAM.”

• Top-down, using industry research and reports.
• Bottom-up, using data from early selling efforts.
• Value theory, using conjecture about buyer willingness to pay.

It’s best to know them all before you go into an investor meeting, or finish polishing your pitch deck.

Knowing your market size is a basic foundational part of launching any startup venture. Every entrepreneur needs to know how to calculate it, and how it relates to potential revenue in their addressable market.

Be realistic. Investors like big numbers, but don’t have patience for flakes over-inflating numbers. You should be able to show the potential to achieve VC sized growth and returns over time. Just make sure you can back up your claims with the data and research, you derived your numbers from, and how you arrived at your assumptions.

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How to calculate market size (and market sizing template!)

Get a handle on the size of your market, and how to use this crucial metric to make profitable decisions.

Do you have an amazing new product you’re ready to launch, but unsure about its sales potential? Or maybe you’re looking to project future revenues, but don’t know where to start. Your first step will be to calculate the size of your market. 

We’re here to help you define your market, show you how to calculate market size and how to use this important metric to estimate the potential value of your customers. 

What is market size?

Market size is the number of people who could potentially become your customers; it is the size of the sales opportunity available to you. Your market size actually captures the customers you could potentially reach with your product.

In many cases, the larger the market size, the larger the opportunity. Does that mean that if you’re selling a mass market product with heavy demand, like hamburgers, soda or cell phones, you’ll automatically have a vast market, and therefore potentially enormous revenue potential? Not quite. Let's dive into examples:

• Existing incumbents in the market If you are creating a new type of hamburger or soda, you’ll find that you’re competing in a saturated market—served by some pretty stiff competition. In a case like this, your potential market size might actually be smaller than you expect.
• Gaps in the market Let’s say you’ve identified a yearning hole in the market, or an underserved group of consumers—that’s great news. Therefore, market size might be relatively straightforward to calculate, by estimating the potential number of customers whose needs are not being met. Unsure where to start? We have a market sizing survey template that you can use to swiftly measure demand for your product among a target audience. 
• Geographical factors Since market size is determined by reach potential, where you are located in relation to your customers also matters for various companies. For instance, if you operate a gas station in a small town, your market size is not every single driver, but only those drivers in your local vicinity or those who happen to pass by your city.

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Why measure market size?

Without knowing the size of your potential market, you’ll be missing some crucial knowledge that will help give you an idea of the potential value of your product or service. Specifically, estimating market size can help you answer several questions fundamental to an optimized marketing strategy that has the ability to turn prospective customers into loyal consumers.

Who are your customers?

Understanding the size of your market is the first step towards getting to know your customers better. Accurate market sizing involves asking questions about the characteristics of your market, such as whether they're male or female, where they tend to live and shop and what their preferences are. With this information, you’ll be able to build up a strong picture of your customers, which will put you in a great position to serve them effectively.

What problems do your customers have—and who is currently addressing them?

Let’s use our soda example to illustrate how to do this in three steps:

• Understanding needs Customers currently have a wealth of different choices such as colas, mineral waters, citrus sodas, juices and so on. This might make you think that customers’ needs are being met. But, some simple  market research  might in fact reveal that demand for sugar-free alternatives are growing, or that there’s a taste for unusual flavors like bacon soda or even a unique flavored soda. 
• Calculate how many customers have an unmet need The next stage is to use a survey to calculate just how many customers have the same unmet need. If the market size for a certain flavored soda is tiny, it might be best to go with another offering.
• Know who your competitors are Knowing who your competitors are is crucial information that, when used alongside your market size data, can help you make decisions such as whether to launch, when to launch or how to shape your value proposition in order to reach customers. If your market size is small, and well served by competitors, you might need to adjust your marketing strategy in order to capture customers. 

What is the business case for your product offering?

Once you have an idea of the problems that your customers have, you’ll be in a strong position to start to build up a business case for your product or service. To do this, we recommend asking yourself two key questions:

• Who specifically has this problem? This means narrowing your focus to the specific segment of customers that has the problem you’ve identified.
• What will be lost if this problem is not addressed? If you don’t follow the market opportunity, do you stand to lose potential revenues, and how much? This is where your market size data becomes invaluable, because you can use it to estimate the likely value of any sales. 

If you are able to show that the cost of not   following the market opportunity is greater than the cost of following it, taking into account factors like investment, business upheaval and reputational risk, then you’ve got yourself a compelling business case for your product.

Define your target market

• Customer surveys If you’re already serving your market, developing a customer survey is an excellent way to start gathering data about your customers. Survey data can help you get important information about customer demographics. However,  customer feedback  data is also valuable in learning more about reactions to your product offerings and identifying any unmet needs. If you’re still at the pre-launch stage and you don’t have any customers to survey, there’s a solution for you.  SurveyMonkey Audience  has a ready made panel of customers, just like the ones you want to serve, on standby and ready to give you crucial insight to help you better understand your future market.  
• Competitor research Another valuable source of market sizing data comes from your competitors. If your competitors are large, public companies, sales data might be readily available, which you can use as a proxy measure of market size. This can be used even if your competitors’ data is not available.

How to calculate market size

Now that you know the parameters of your target market, you can start narrowing and calculate your market size opportunity. To do that, we recommend the following three-step process:

1. Define your total available market (TAM)

TAM is the total demand for a product or service like yours. If you’re developing a new sugar free soda drink, that might mean estimating the demand for low calorie drinks generally.

2. Find your serviceable available market (SAM)

SAM is the subset of TAM to whom could feasibly reach within a specific geographical or market area. For example, your new drink might only initially be available to people who live in New York City, or to people who buy at vending machines.

3. Define your serviceable obtainable market (SOM)

SOM is a smaller subset of the SAM that you will specifically be able to capture. This will include customers that are not currently being served, or that are unhappy with existing market offerings. Let’s assume your new drink might be available in vending machines everywhere. This means only customers who want to try something new or who visit machines that don’t have any alternative sugar-free offerings might be willing to purchase your sodas.

The great thing about defining your target market in this way is that it shows you the scalability of your product—and therefore the full size of the market opportunity. Sure, you won’t be able to serve the total available market in the immediate term—but you could in the future, for example, by expanding your product range, or the geographical distribution of your products and services.

Calculating market volume

Once you have an idea of the size of your market, you can estimate the market potential, or market volume. Market volume describes the total amount of potential transactions that you could make within a specified period of time such as per day, per month, per quarter or per year. In order to estimate your market volume, you need to know the penetration rate of your product or service.  

What is penetration rate?

Penetration rate is the proportion of the market size that you have served at least once.

The following equation can be used to easily calculate your penetration rate:

Penetration Rate = (Number of Customers ÷ Target Market Size) × 100

 For instance, let’s imagine you sell sugar free soda to gyms to load into their vending machines, and your region has 2000 gyms. If you have managed to sell to 150 gyms so far, your penetration rate is 150/2000 x 100 = 7.5%.

Calculating market value

With your market volume determined, you can multiply it by the average value of your product or service. For instance, if your average sale to gyms was $10,000 and you sold to 150 gyms, then the market value is $1,500,000. Looking at this the other way, if you increase your penetration to 15%, your market value could double to $3 million! So, market size provides a great basis for understanding the potential for your business to scale, and grow.

Target market segmentation

Segmenting the market is the first stage of a successful, strategic marketing planning process. After the market has been segmented, you can identify those segments that you view as primary consumers and thus the focus of the bulk of your marketing and sales activities. You can also tailor your marketing mix in a way that the different segments understand and appreciate, thus putting you in a better position to be able to capture and serve these markets.

Using segmentation, you take a diverse population of consumers and divide them into smaller groupings, comprised of consumers that are more homogenous in terms of demographic, psychographic, behavioural and attitudinal characteristics and needs. 

Segmentation survey

Continually narrowing your market in this way may seem daunting, but there are plenty of tools available to help you. The most effective approach is to use a segmentation survey. This is a specially designed survey that gathers data on factors like customer age, gender, household size and geographical area to build up a picture of your entire customer base, and the factors along which it makes sense to segment them. 

If demographic characteristics like these are important to you, consider using a demographic survey template to get started today. Or, perhaps you’re looking for a more detailed survey, capturing a range of segmentation dimensions like lifestyle factors or attitudes. This can help you quickly build some comprehensive buyer personas.

Conducting market research

Using a segmentation survey is just one way of gathering information to better understand the size of your market. Other types of market research can also help you get a handle on likely interest in your product or service, demand for it, and the size of the market that you have the potential to capture.

Brand awareness research

How well known is your brand? Brand awareness data gives you a good idea of the potential volume of your future sales. If your brand is well known, then you have the potential to reach a larger proportion of your target market. In contrast, if you have a little known brand, your reach is likely to be smaller. If that’s the case, don’t worry: you should see low brand awareness as an opportunity to grow through a careful marketing campaign. In the first instance, we recommend a brand awareness survey .

Transaction data

Analyzing historical transaction data from a previous period can also help you get a better understanding of the size of your market. Sales volume and sales value data will be especially relevant. This data can be captured yearly, quarterly or even monthly. Combined with additional secondary research into the market, such as research that shows how quickly the industry is growing, or an increasing appetite for a product like yours, you can make some pretty solid predictions about future changes in market size.

Market sizing

Market sizing is a catch-all term for synthesizing data from a variety of sources to help you to understand your market size. Market sizing is best used when you’re in the process of developing a new product or service, or preparing to launch it, because it gives you insight into the market potential and likely value of the new market. However, it also makes sense to conduct market sizing activities regularly. 

Markets are not static, and new entrants, and changing customer demand means it makes sense to regularly assess the size of your market. There are two main approaches to this. Let's take a look at each:

Top down market sizing

Top down market sizing evaluates the "relevant" market size for your offering, and then estimates how much you have the potential to earn from a market of that size. Simply put, it’s a way of estimating market value by extrapolating existing market volume to the broader market size.

For example, let’s imagine your research has revealed that there are 41,000 health and fitness centers located across the United States. You know that you’re currently making an average sale of $10,000 for the 150 gyms you currently count as clients. That means your potential market size using the top down method is a whopping $410,000,000.

Of course, this figure is likely to be unrealistic. Not all gyms will have vending machines, and gyms differ in size, so even if you could sell to all gyms, they won’t all necessarily purchase $10,000 worth of your soda each. So, the top-down method might give you inflated, unobtainable figures, which could undermine the ability to develop a successful marketing strategy.

Bottom up market sizing

The alternative is the bottom up market sizing approach. While the top down method is simplistic, the bottom up approach tends to involve a greater investment of time and effort because you use more sophisticated market research. However, if you spend the time, you’ll get a more reliable and accurate estimate of market size.  

Perhaps the most common approach is to use your segmentation data to make estimates of the size and value of each segment, and how likely each is to grow.

As an example, assume that based on your market research, your soda company is targeting two segments: gyms and schools. In this case, you might use a variety of data sources, like your customer survey data, transaction data, or brand awareness data, to estimate the size of both segments. You can then project growth rates based on secondary research. 

For instance, let’s say that your transaction data reveals that 80% of your customers are gyms and 20% are schools. Secondary research shows that new gyms are opening at a rate of 2% per year, but that schools are not growing because of a slowdown in the birthrate. Using this information, you assume that your gym segment will likely grow much faster than your school segment—crucial knowledge in helping you to decide where to focus your marketing resources and efforts.

Calculate market size quickly 

So, whether you’re just starting out in business or you have an established product and market, you can see that calculating market size matters to making effective business decisions. Ready to get going? Use our  market sizing template  to start calculating your market size quickly and efficiently, or  get in touch  with our team of market research experts to help you run a market sizing study tailored to your needs.

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Home > Business Plan > Market Size in a Business Plan

Market Size in a Business Plan

… the market size looks like this …

What is Market Size?

To the investor, the solution in itself has no value unless it can be realized in the market place. Ultimately, it will be the industry market size that decides the value of your business to an investor and, as a rule of thumb, the bigger the available market, the better.

How to Calculate Market Sizes

TAM (Total Available Market) is the total market size (people, revenues, units etc.) who have the problem you are seeking to solve today.

SAM (Served Available Market) is the part of the TAM who are able to use your solution to the problem. This is your target market .

Available Market Size Estimation

The total available market or TAM is based on the number of properties in the region which use lawn care treatments. Using a top down approach, Government statistics might show that there are six million properties with gardens and industry analysis reveals that 3% of properties use lawn care treatments, and spend an average of 150 per year. The TAM is calculated as follows:

TAM = 6 million x 3% x 150 = 27 million per year

This means that if your business operated throughout the entire region with no competition its revenues would be 27 million per year. TAM defines the maximum size for the market the business operates in.

However, at the moment not all of the TAM are able to use your lawn care service as you only have one lawn care outlet in one town in the region. The market which is able to use your solution is limited to the town, so the serviceable available market or SAM is based on the number of properties with gardens within the town. Again, Government statistics might show that there are one million properties with gardens in the region, so the SAM is given as follows:

SAM = 1 million x 3% x 150 = 4.5 million (16.7% of TAM)

If there was no competition within the town and you had the resources to provide the service , then the revenue from the business would be 4.5 million per year. The SAM represents 16.7% of the TAM.

Market Size and Growth

The investor will also want to know whether this is a growing or declining market. The market size section of the business plan should also give an indication of the potential for growth over the next five years. We might be able to find additional market size data which shows that the number of properties with gardens will grow to 20.5 million, and the number using lawn care treatments is expected to increase to 4%, with an average spend of 165. the TAM is calculated as follows:

TAM = 6.5 million x 4% x 165 = 42.9 million per year in five years time

Like wise for the town the number of properties with gardens might be expected to increase to 1.15 million, and the SAM is given as follows:

SAM = 1.15 million x 4% x 165 = 7.59 million (17.7% of TAM)

Market Estimate Presentation in the Business Plan

The business plan market size section can be presented in a number of formats, but a simple column format setting out the TAM and SAM now and in five years time, will allow the investor to quickly ascertain how big the market for the product could be and it prospects for growth over the duration of the business plan.

Market sizing is an important part of the business plan process. But this is planning not accounting. The market size section is an educated guess at how big the available market for the product is and aims to show that a successful launch and continued growth for the product is possible. It is based on available statistics and trade association data.

A few key points should be remembered when trying to determine market size

• Start from verifiable and accurate base data. In the above example, the starting point was a government statistic based on the number of properties with gardens.
• Double check any information with an alternative source if possible.
• Check the results make sense.
• Check the results using a bottom up calculation. For example, if you know a lawn care business in the region has revenue of 500,000 and estimated 2% of the market, then the TAM should be in the order of 500,000 / 2% = 25 million compared to the 27 million calculated above.
• Keep the industry definition narrow, in this case lawn care treatments.
• Be specific, don’t try and say for example, there are millions of properties in the world with gardens and if we can take a very small percentage of that our plan will work.
• The analysis will differ depending on whether you are dealing with an existing market or a completely new market. For an existing product there will be market and industry data available, for a new product you may need to carry out market size research with potential customers and work upwards from there.

This is part of the financial projections and Contents of a Business Plan Guide , a series of posts on what each section of a simple business plan should include. The next post in this series is about the analysis of the target market for the business plan product.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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In this guide, we'll delve into the intricacies of raising capital in the US, from identifying and engaging investors to negotiating term sheets and closing the deal so you can fuel your company's growth.

How to estimate market size: Business and marketing planning for startups

Sizing the market is a necessary task for business and marketing planning, and budgeting for all startups, especially those that seek third-party financing such as venture capital (VC). Even though their investment philosophies may differ, most VCs and angel investors would like to know that they are investing in a market with a large potential size (typically, at least $1 billion).

Understanding your market potential

Even if you do not seek external financing, understanding your market potential is essential for a range of different strategic decisions, in areas such as:

• Product development
• Partnering and distribution
• Organizational design and critical employee skills

Starting point for estimating market size: Know the problem you are solving

The starting point for estimating market size is to understand the problem you solve for customers and the potential value your product generates for them. This is an aspect that many startup founders in the innovation community tend to overlook, since they get excited about the product they’ve developed without thinking about how it benefits their audience.

Depending on your technology, you may have to choose which customer problem to solve first. If this is the case, completing the exercise below may help you better grasp the market size for each application. This will make it easier to prioritize which problem to solve first.

Exercise: Estimating market size

This exercise consists of five steps to help you estimate the total market potential for a product. In each step, we build on a health innovation case study that assumes the problem we solve relates to patient safety in hospitals.

Step 1. Define your target customer

All early-stage entrepreneurs and startups must define their target customer .

Your target customer equals the person or company for whom your technology solves a specific problem. To define your target customer you must:

• Determine who your target customer is.
• Create a profile of your typical/expected target customer.

Given the importance of defining your target customer, it is crucial to set aside enough time to do a proper analysis of this first step.

Case study: We have analyzed patient-safety procedures in a few hospitals. We have determined that our innovative technology would generate the most value in the largest hospitals (the top 25%, ranked by size).

Step 2. Estimate the number of target customers

Estimate the total number of target customers in the market—companies who have a profile similar to that of your target customer.

If you’re a startup venture in Ontario or another Canadian province, you can use industry databases such as those offered by Statistics Canada, U.S. Bureau of Economic Analysis or Hoovers to help you quantify your market.

Case study: By studying publicly available sources, we have found out that in our target group there are 1,300 hospitals in Canada and the United States.

Step 3. Determine your penetration rate

Refine your market size by assuming a penetration rate for your category of product. The penetration rate is a function of the nature of your product. Assume a high penetration rate if your category of product is mission-critical or mandated through regulation; assume a low penetration rate for products with a specialized purpose.

Example: penetration rates of computers versus business intelligence systems:

• Computers, word-processing and internet: It is almost impossible today to operate a business in the developed world without a computer that has word-processing capabilities and is connected to the internet. While the penetration of those three technologies has not quite reached 100%, it is close enough to use that assumption for business growth and planning.
• Business intelligence systems: In theory, most companies would benefit from having a business intelligence system – a type of software that is used to manage and analyze data about finance, sales, and marketing activities, in addition to more specialized purposes. In practice, however, few ventures have the combination of the scale, skills and business practices required to make business intelligence systems a worthwhile investment.This limits the penetration rate to very large organizations that make up maybe less than 1% of all businesses in the developed world. Nevertheless, while 1% may not sound like a lot, it still represents a much larger number of target customers than a new startup could effectively pursue.

Case study: We have studied the factors that drive improvement in patient safety across North America, and found that it depends on provincial and state regulations. Based on areas where patient-safety regulations are strict, we can assume a penetration rate of 70% for our technology .

Step 4. Calculate the potential market size: Volume and value

Market volume.

To find the overall market potential (that is, the potential market volume), multiply your number of target customers by the penetration rate (see steps 2 and 3 above).

Case study : Using our fictitious example, where the number of target customers is 1,300 and the penetration rate is assumed to be 70%, the potential market volume would be calculated as follows:

1,300 hospitals × 70% = 910 hospitals

Market value

To calculate the monetary value of the market, multiply the market volume by your average value (that is, price expectations).

Case study: We assume each sale to a hospital will yield an average value of $2.5 million. To find the market value, we calculate the following:

910 hospitals × $ 2.5 million = $ 2.275 billion

5. Apply the market-size data

Following these steps to estimate your market size (value) is by no means an exact science. Still, there are ways to maximize the effectiveness of this exercise:

• At the time you make your first estimate, examine each assumption you make and what would cause it to change. To factor in the risks of change, calculate best-case and worst-case scenarios in addition to your expected scenario.
• Over time, monitor the accuracy of your initial assumptions and whether you need to modify them.

Case study: Our patient-safety technology may appeal to hospitals of a smaller size than initially assumed, especially if new regulations mandate tighter patient-safety procedures from all hospitals. While such a change would more than double the number of hospitals in our target market, smaller hospitals would not be able to pay as much, in turn driving the expected average price per sale down to $2 million.

Note: This exercise aims at estimating the total market potential for a product. It is important for startups to recognize that both early adopters and laggards are included in those numbers. While early adopters will likely be your customers in years 1 and 2, the laggards may not enter the market until year 20 or later. In terms of our case study, this would mean that the size of the market in year 1 would be about $100 million if early adopters comprise 5% of the overall hospital market for patient safety. For a more detailed understanding of how markets develop, read the article Technology adoption lifecycle .

The highlights

• Define your target customer
• Estimate the number of target customers
• Determine your penetration rate
• Calculate the potential market size: Volume and value
• Apply the market-size data
• The starting point? Understand the customer problem you solve and the potential value you generate.

Summary: These five steps outline how to estimate a market size—essential when making strategic decisions (e.g, business and marketing planning) and seeking third-party financing (e.g., venture capital).

Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.

Want to learn how to understand and talk to your customers? Join us for our next cohort of the Customer Development Immersive.

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How to Calculate Market Size (+Template)

Knowing your market size is key to business success. Learn how to calculate it and use that knowledge to drive growth and secure funding.

Updated Sep 10, 2024

When you're planning to start or grow a business, one of the first things you'll need to figure out is the size of your market. Market size isn't just a fancy business term — it's the total potential sales volume or revenue your business could achieve in a specific market. It's like knowing the size of the pie before you decide how big of a slice you want.

Calculating market size is especially critical for startups and companies launching new products. Why? Because it gives you the data you need to make informed business decisions, develop effective marketing strategies, and attract investors.

If you know your market size, you can better assess your business's potential, set realistic goals, and understand the opportunities (and risks) you're facing. So, whether you're just getting started or planning your next big move, knowing how to calculate your market size is a must.

• Key Concepts in Market Size Calculation

Understanding the key concepts behind market size calculation is essential for accurately assessing your business's potential. In this section, we'll break down the foundational terms — TAM, SAM, and SOM — that will guide you through the process of estimating market size effectively.

Total Addressable Market (TAM)

Let's start with the big picture — your Total Addressable Market, or TAM. TAM represents the total demand for your product or service if you could sell to every single potential customer out there. It's the maximum revenue opportunity available if there are no competitors and you capture 100% of the market. For example, if you're selling coffee, TAM would be the entire global market of coffee drinkers.

But remember, TAM is just a starting point. It's more like a dream scenario, but it's good to know because it gives you a sense of the total potential market size.

Serviceable Available Market (SAM)

Next, we narrow it down to the Serviceable Available Market, or SAM. SAM is the portion of TAM that your business can realistically target. It's a more focused look at your market — considering factors like geography, customer demographics, and specific product or service features. If you're selling coffee in the U.S., your SAM would be the total demand from coffee drinkers within the country.

SAM helps you zero in on where you can actually sell your products and who your potential customers are, making it a crucial step in market size calculation.

Serviceable Obtainable Market (SOM)

Finally, we have the Serviceable Obtainable Market, or SOM. This is where things get realistic. SOM is the portion of your SAM that you can realistically capture, considering competition, market conditions, and your business's capacity. If you're a small coffee startup, your SOM might be the local market or a niche segment within the larger U.S. coffee market.

SOM is the most actionable of these metrics — it's where you set your sights and make your business goals. By focusing on SOM, you can set realistic targets, allocate resources wisely, and plan for growth without overreaching.

• Approaches To Calculating Market Size

There are two main approaches to calculating market size: top-down and bottom-up. Both have pros and cons, and the right one for you depends on your business and available data.

Top-Down Approach

The top-down approach starts with a broad industry size and then narrows it down based on relevant factors. It's like starting with the whole pie and figuring out how much of it you can actually eat. You begin by looking at industry reports, market research data, and broad market trends.

For example, if you're in the consumer electronics business, you'd start by finding the total size of the global electronics market. From there, you narrow it down by region, product category, and customer segment until you arrive at a more focused market size.

Example: Estimating Market Size for a Consumer Electronics Product

Let's say you're launching a new type of smartphone. You'd start by looking at the total global smartphone market, which might be worth hundreds of billions of dollars. Then, you'd narrow it down to the specific segment your product fits into, like mid-range smartphones in North America. Finally, you'd consider factors like your price point, brand recognition, and marketing reach to estimate your potential market size.

Bottom-Up Approach

The bottom-up approach starts with specific data — like the number of potential customers and average price — and builds up to a market size estimate. It's like adding up all the slices to see how big the pie is.

This approach is often more accurate because it's based on actual data rather than broad estimates. You start by calculating the number of potential customers in your target market, then multiply that by your average selling price. You can also factor in other metrics like market penetration rates and customer acquisition costs to refine your estimate.

Example: Calculating Market Size for a SaaS Product

Imagine you're launching a new SaaS product targeting small businesses. You'd start by estimating the number of small businesses that need your product, say 100,000. If your average annual subscription fee is $1,000, your market size would be $100 million. You can further refine this by considering factors like customer retention rates and market growth trends.

Comparison of Top-Down vs. Bottom-Up

So, which approach should you use? The top-down approach is quicker and easier, especially if you have access to good industry data. It's useful for getting a rough estimate or for industries with well-defined market segments. However, it can be less accurate because it relies on broad estimates.

The bottom-up approach, on the other hand, is more detailed and often more accurate, especially for niche markets or new products. It's based on actual data from your target market, making it a better choice for startups or businesses with specific, measurable markets. The downside? It can be time-consuming and requires more detailed information.

• Steps To Estimate Market Size

Now that you understand the basic concepts and approaches, let's walk through the steps to estimate your market size. This step-by-step guide will help you apply what you've learned to your specific business.

Step 1: Define Your Target Market

First things first — you need to define your target market. This involves understanding who your customers are, where they are, and what they need. Market segmentation is key here. You'll want to break down your potential customers by demographic factors (like age, income, and gender), geographic factors (like location), and behavioral factors (like purchasing habits and brand loyalty).

Tips for identifying your target audience:

• Create customer personas that represent your ideal customers.
• Use surveys, focus groups, and market research to gather data on your target market.
• Consider factors like customer pain points, needs, and preferences when defining your market segments.

Step 2: Gather Market Research and Data

Next, it's time to gather the data you'll need to calculate your market size. This includes industry reports, historical data, and other relevant metrics. LinkedIn can be a great resource for identifying potential customers and understanding market trends.

Sources of market data:

• Industry reports from sources like IBISWorld or Statista.
• Market research studies and surveys.
• LinkedIn and other social media platforms for networking and customer insights.

Step 3: Estimate the Number of Potential Customers

Once you have your data, you can start estimating the number of potential customers in your target market. This step involves using your market segmentation and customer personas to calculate how many people fit your target profile.

Estimation tips:

• Use market segmentation data to estimate the size of each segment.
• Multiply the number of potential customers by the percentage of the market you expect to capture.

Step 4: Calculate Market Value

Now it's time to put it all together and calculate your market value. This is done by multiplying the number of potential customers by your average price or revenue per customer. This will give you a rough estimate of your total market value.

Working Example: If you have 10,000 potential customers and your average price is $500, your market value would be $5 million. This figure gives you a clear idea of the revenue potential in your market.

Step 5: Assess Market Penetration and Growth Potential

Finally, assess your market penetration and growth potential. Market penetration is the percentage of your target market that you expect to capture, while growth potential considers how much the market is likely to grow in the future.

Considerations:

• Evaluate your competition and market saturation.
• Look at industry growth trends to estimate future market size.
• Factor in your marketing and sales strategies to determine realistic penetration rates.
• Practical Examples

To bring all of this theory into practice, let's look at some real-world examples of market size calculation. These case studies will help you see how the concepts and steps we've discussed can be applied in different business scenarios.

Example 1: Market Size Calculation for a New Product Launch

Let's say you're launching a new organic skincare line. You decide to use the bottom-up approach to calculate your market size. You start by identifying your target market — women aged 25-45 who are interested in natural and organic beauty products. After conducting market research, you estimate that there are 5 million potential customers in this segment.

Next, you calculate your market value. You expect your average order value to be $50 and plan to capture 2% of the market within the first year. Your estimated market size would be $5 million (5 million customers x $50 average order value x 2% market penetration).

Example 2: Market Size Estimation for a Startup

Now, let's consider a startup offering a new project management software. You decide to use the top-down approach. You start by looking at the total market size for project management software, which is estimated at $10 billion globally. You then narrow it down to your specific target market — small to medium-sized businesses in North America. This segment represents 20% of the global market, or $2 billion.

Finally, you consider your market share. Based on your product's unique features and pricing, you estimate that you can capture 5% of this segment, giving you a potential market size of $100 million.

• Tools and Templates for Market Size Calculation

Now that you understand the theory and have seen practical examples, let's talk about the tools and templates that can make your market size calculation process easier and more efficient.

Market Size Calculation Tools

There are several online tools available that can help you estimate market size more accurately. These tools often come with built-in data sources and calculators, which streamline the process and allow you to focus on analysis rather than data gathering.

Popular tools include:

• Google Market Finder . A free tool that helps businesses discover new markets and estimate their size based on available data.
• TAM Calculator . This online tool is specifically designed to help you calculate Total Addressable Market, Serviceable Available Market, and Serviceable Obtainable Market by guiding you through each step with predefined fields.
• LinkedIn Sales Navigator . While not a direct market size calculation tool, LinkedIn Sales Navigator can help you identify and segment your target audience, providing valuable data for bottom-up calculations.

Market Size Calculation Template

To help you get started with your calculations, we've created a simple, customizable template that walks you through each step of the process. This template is designed to be user-friendly, guiding you from defining your target market to calculating your TAM, SAM, and SOM.

Download Market Size Calculation Template

Using Templates in Business Planning and Pitch Decks

Once you've calculated your market size, it's important to integrate this information into your business planning and investor communications. For startups, market size data is a critical component of your pitch deck. Investors want to see your TAM, SAM, and SOM figures and the reasoning behind them.

Tips for presentation:

• Visuals. Use charts and graphs to present your market size estimates visually. This makes the data easier to digest and more compelling.
• Clarity. Clearly explain how you arrived at your numbers, including the sources of your data and the assumptions you made. Transparency builds trust with potential investors.
• Strategic insights. Go beyond the numbers. Discuss what your market size means for your business strategy, product development, and growth potential.
• Common Mistakes and Pitfalls To Avoid

Calculating market size is crucial, but it's easy to make mistakes that can lead to overestimations or missed opportunities. Let's discuss some common pitfalls and how to avoid them.

Overestimating Market Size

One of the most common mistakes is overestimating your market size. This can happen when you fail to segment your market accurately or assume you can capture a larger share than is realistic. Overestimating market size can lead to misguided business strategies, unrealistic revenue expectations, and potential difficulties in securing investor funding.

How to avoid overestimating:

• Be conservative. Use conservative estimates, especially when calculating SOM. It's better to under-promise and over-deliver.
• Double-check your assumptions. Review your assumptions and calculations with a critical eye. Ask whether they truly reflect the realities of your market.

Ignoring Market Segmentation

Another common mistake is ignoring the importance of market segmentation. Without proper segmentation, you might end up with a market size estimate that's too broad, leading to a lack of focus in your business strategy.

How to avoid ignoring segmentation:

• Deep dive into data. Take the time to thoroughly analyze and segment your market. This includes understanding the specific needs, preferences, and behaviors of different customer groups.
• Use personas. Create detailed customer personas to help visualize and define your target segments.

Failing To Consider Market Dynamics

Markets are dynamic and ever-changing. Failing to account for these changes can make your market size estimates outdated or inaccurate. Factors like new competitors, shifting consumer preferences, and economic changes can all impact your market size.

How to avoid overlooking market dynamics:

• Stay updated. Regularly update your market research and adjust your calculations as necessary. What was accurate a year ago might not hold true today.
• Scenario planning. Consider different scenarios for market growth or contraction. This can help you prepare for various outcomes and adjust your strategy accordingly.

• The Importance of Calculating Market Size

Calculating market size is crucial for business planning, strategy development, and attracting investors. Understanding TAM, SAM, and SOM allows you to break down your market into actionable segments, helping you target the most relevant and profitable areas.

The top-down market sizing approach offers a quick, broad estimate, while the bottom-up approach provides a more detailed and accurate overall market assessment. Using practical tools and templates can further streamline your calculations and help you present your findings effectively.

For new businesses and startups, the next steps are clear: begin by defining your target customers and gathering relevant data. Use the tools and templates provided in this guide to calculate your customer base size, and then integrate your findings into your business plan and pitch deck to support your growth strategy and attract investment.

By taking the time to accurately calculate your market size, you're setting your business up for informed decision-making and long-term success. Remember, market size isn't just a number — it's the foundation for your entire business strategy.

If you need further guidance on capital requirements or funding strategies, consider reaching out to experts at Clarify Capital who can help ensure you're fully prepared to secure the investment necessary to grow your business.

Emma Parker

Senior Funding Manager

Emma holds a B.S. in finance from NYU and has been working in the business financing industry for over a decade. She is passionate about helping small business owners grow by finding the right funding option that makes sense for them. More about the Clarify team →

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