The concept of market sizing is highly relevant in many business scenarios you might come across, and is therefore a fundamental part to consider in every business decision you take. Determining the size of the market can provide significant insights in terms of investments, growth targets, performance evaluation and other strategic questions.
The first step to calculating the market size is understanding what a market actually is. The market is the aggregate of buying decision makers who have a common need or want, which is fulfilled by your product or service. In order to get a real feel of your market you will need to carefully examine various factors, such as:
Total Addressable Market (TAM) refers to the revenue opportunity available for a particular product or service. According to early stage startup investor at Matrix Partners, Jared Sleeper, there are three ways to calculate TAM:
Furthermore, you need to make sure that you are taking into account upcoming changes into your future projections. For example, if a product category within the market in question is expected to experience a severe decline in the next year due to external factors, you will need to account for the change of market size.
Whether you are launching a new startup venture, considering expansion, or pursuing a new product development initiative, it is vital that you know your market size, and how it translates to potential revenue. As a final note, remember that you need to be explicit about the assumptions made and data utilized when estimating a market size.