How to Determine Your Market Size
How to assess market size for a small business plan.
As you develop your business plan, you should estimate your market size to understand the potential for your product or service. This information helps you determine whether your business idea is viable and provides insight into the level of investment necessary to launch and grow your business.
This article will provide information about estimating your market size using proven approaches. We’ll also offer market size examples and an outline that you can use for writing your business plan. Together these will serve as a template to help you understand the importance of assessing the market and future growth potential for your business.
What is market size?
Market size is the total revenue generated by all the businesses that offer products or services similar to yours. It’s an indicator of the potential demand for your business and provides an estimate of the market size you will be competing for.
How is market size measured?
Market size is measured in terms of the total revenue generated by all the businesses that offer products or services similar to yours. This information can be gathered through market research, including surveys, interviews, industry reports, and data analysis.
What level of detail do investors and lenders expect to see in your business plan?
Investors and lenders typically expect to see a detailed analysis of your target market and the potential market size for your business. This analysis should include the total market size, target market, and estimated market share. They may also expect to see information on the competition in your market, growth trends, and any other factors that may impact the potential for the success of your business.
Key Terms to Understand Market Size
In the introduction, we stated that market size is the total amount of revenue that is currently being generated for a given product or service in a defined area. The following terms will help you understand the market size and potential more completely.
Total Addressable Market
The total addressable market (TAM) is the full revenue opportunity available for a product or service, assuming 100% market share without considering any competition or other external factors that may limit the potential market size. This is the maximum possible revenue your business could generate if you capture the entire market.
Serviceable Available Market
The serviceable available market (SAM) is the portion of the total addressable market that you can realistically reach and serve with your product or service. The SAM considers factors such as geographic limitations, customer demographics, and market saturation.
SOM or Obtainable Market
The SOM, or obtainable market, is the portion of the serviceable available market that your business can realistically capture based on your marketing and sales efforts, resources, and competitive landscape. This represents the market share that you can expect to achieve based on your ability to reach and serve customers within the serviceable available market.
Market share is the percentage of total revenue in a particular market that is generated by your business. It is calculated by dividing your business’s revenue by the total revenue generated by all the firms in the serviceable market. This metric provides insight into your business’s market position and ability to compete with other companies that customers will consider when looking for products and services like those you offer.
Quantifying Your Market Size
How to Estimate the TAM for your business idea
To estimate your total addressable market (TAM), you may use various methods, including top-down analysis, bottom-up analysis, or industry reports and research. Top-down analysis involves estimating the total market size and then narrowing it down to the specific niche that your business serves, whereas bottom-up analysis involves estimating the size of your niche market and then extrapolating to estimate the total market size. Additionally, you may use industry reports and research from third-party sources to help assess market size.
How to determine the SAM for your business idea
To determine your serviceable available market (SAM), you need to identify your target market and estimate the number of potential customers. This process involves researching and analyzing data on customer demographics, psychographics, and behaviors to understand their needs, preferences, and buying habits. Once you have identified your target market, you can estimate the market size by including population statistics, market research reports, and surveys.
How to determine the SOM for your business idea
You must assess your competitive landscape, marketing and sales strategies, and resources to determine your obtainable market or SOM. This involves understanding your competitors, their market share, their strengths and weaknesses, and developing a marketing and sales strategy that will allow you to reach and serve your target market. Once you clearly understand your competitive landscape and your marketing and sales strategy, you can estimate your SOM based on your ability to capture market share.
Calculating the market size for your business
To calculate the market size for your business, you will need to estimate your SOM and then multiply it by the size of the market in terms of revenue. Complete this by multiplying the total revenue of your industry by your estimated market share.
Alternatively, you can estimate your market size by multiplying the total number of potential customers in your target market by the average revenue per customer. These calculations will help you determine the potential revenue your business can generate within its target market.
A Reality Check on Your Market Size Estimate
Does it feel right?
Take a critical look at your market size estimates and ask yourself if they feel realistic. Are your assumptions based on accurate and up-to-date information? Are there any factors you might be overlooking that could impact the size of your market? It’s essential to consider both the macro and micro-level factors that could affect your market size. These include technological changes, consumer preferences, economic conditions, and any relevant regulatory changes.
Cite sources for your assumptions
When making assumptions about market size, citing your sources is important. Investors and lenders will want to see that your estimates are based on credible data and research. Look for industry reports, market research studies, and other sources supporting your assumptions. It would be best if you also considered conducting your own primary research, such as surveys or focus groups, to validate your assumptions and gather more information about your target market.
Socialize your estimate with trusted advisors
Get feedback from people who have experience in your industry and can provide insights into the size of the market. Talk to advisors, mentors, and industry experts who can help you validate your assumptions and provide a reality check on your market size estimates. By getting feedback from trusted sources, you can refine your estimates and improve the accuracy of your business plan. It’s also important to be open to constructive criticism and to revise your estimates if necessary based on the feedback you receive.
Common Questions About Market Size for a Business Plan
How does competition fit into market size estimates?
When estimating market size, it is crucial to consider the competitive landscape. If there are many existing players in the market, then the overall market size may be smaller than if the market is relatively unexplored. Investors and lenders will want to see that you have taken this into account and that your market size estimate is realistic, given the level of competition in the industry.
Does competition fit into TAM, SAM, or SOM?
Competition can fit into all three market size categories – TAM, SAM, and SOM.
When estimating the Total Addressable Market (TAM), consider the level of competition in the entire market, as it represents the total demand for a product or service, including all competitors.
When estimating the Serviceable Available Market (SAM), evaluate the level of competition within the specific geographic or demographic segment being targeted. Looking at competition allows for a more accurate estimate of the market share that the business can realistically capture.
When estimating the Share of the Obtainable Market (SOM), consider the level of competition for the specific customers or clients the business aims to capture. This approach allows for a more realistic estimate of the market share the company can realistically capture based on the level of competition and other factors.
How do growth trends fit into market size estimates?
Growth trends are an important consideration when estimating market size. If the market is projected to grow rapidly over the next few years, then the overall market size will be larger than it is currently. Conversely, if the market is projected to decline or grow slowly, then the overall market size will be smaller. When estimating market size, consider these growth trends and justify your assumptions with credible sources.
How to measure growth rates locally versus regionally or nationally?
Measuring growth rates can be done at different levels, depending on the scope of the market analyzed. For example, if you are analyzing a local market, look at the growth rate of the overall population or the number of businesses in the area. If you are investigating a national market, look at the growth rate of the overall economy or the industry you are entering. Make sure you are using the right metrics for the market you are analyzing and that you can justify your assumptions.
What if my business can grow faster than the overall trends?
If you believe your business can grow faster than the overall trends, it’s important to be able to explain why. This might be because you have a unique value proposition, a better product, or a more effective marketing strategy. When estimating market size, you should consider the potential impact of your business on the overall market and adjust your estimates accordingly. Investors and lenders will want to see that you have a realistic and well-supported estimate of your potential market share.
Market Size Outline for a Business Plan
A Market Size Template
The market size outline below will help ensure that your business plan addresses the critical aspects of market size that investors and lenders want to know. As a business owner, this will also help you look at your business quantitatively to arrive at estimates based on sound principles.
- Market served by your products or services
- Total market size today in dollars
- The specific segment you’re measuring
- Dollar volume being sold today
- Historical and future growth trends
- Compound annual growth rate or CAGR
- Accelerating or decelerating trends
- Total addressable market
- Narrative on how you are defining your addressable market
- A numerical estimate of TAM based on your definition
- Total serviceable market
- How do you define your serviceable market
- A numerical estimate of SAM based on your definition
- Total obtainable market
- How will you reach the obtainable market
- A numerical estimate of the SOM based
- Your expected market share
- The total market size in your addressable market
- Your market share estimate in percent
- Your revenue estimate based on market share
- Site sources wherever possible
- Web research
- Industry associations
- Other sources
Market Size Examples for a Business Plan
Market Size Example One: Jolly Organic Pet Foods
Based on our research, we estimate that the total addressable market (TAM) for our proposed product, which is a premium line of organic pet food, is around $1 billion. This includes dog and cat owners interested in high-quality, all-natural, and organic pet food in the United States.
Our serviceable available market (SAM) is estimated to be around $100 million, a subset of the TAM we are targeting. We arrived at this estimate by focusing on the demographic of pet owners who are currently buying premium pet food and are likely to be interested in our product.
Looking at our budget and the geographies we plan to target initially, our Serviceable Obtainable Market (SOM) is just 5% of the US market. This brings our SOM to $10 million.
We also took into account the presence of competitors in the market. We estimate that our share of the SOM will be approximately 20%, which equates to $2 million in annual revenue by the end of year one. We arrived at this estimate by analyzing the current market share of our competitors and factoring in our unique value proposition and target audience.
As the business achieves its plans and goals, we will expand into other markets, increasing the revenue potential. The numbers above are based on our initial launch covered in the business plan.
These estimates are subject to change as we gather more data and feedback from potential customers and industry experts. In addition, we plan to continuously monitor and adjust our market size estimates as needed to ensure a realistic understanding of the market and our potential for success.
Market Size Example Two: Get Your Fitness Goal – An app for making it happen.
Get Your Goal is a software company that creates apps for tracking personal fitness goals. The market size section of their business plan is shown below.
As of 2021, the global market size for fitness and wellness mobile apps was estimated to be around $280 million and is projected to grow at a CAGR of 21.6% from 2021 to 2028. However, this includes various fitness and wellness apps, including diet and nutrition, mental health, and medical conditions. To narrow down the market size for personal fitness and goal-setting apps specifically, we need to look at the Total Addressable Market (TAM).
According to a report by Statista, the total number of health and fitness app downloads worldwide was 100 million in 2020, and it is projected to increase to 220 million by 2025. This indicates a growing demand for personal fitness and goal-setting apps. To estimate the TAM for this specific market, we can assume that not all app downloads necessarily result in active usage or revenue generation. However, if we take a conservative estimate of 10% of downloads leading to active usage and revenue generation, then the TAM for personal fitness and goal-setting apps would be around 22 million users.
To estimate the Serviceable Addressable Market (SAM), we need to look at the subset of the TAM that our app can realistically target. For instance, if our app is only available in English and targets individuals living in the United States, our SAM would be smaller than the global TAM. Based on research, the SAM for our personal fitness and goal-setting app would be around 1.5 million users.
Finally, to estimate the Serviceable Obtainable Market (SOM), we must consider the realistic market share our app can capture within the SAM. Assuming a conservative 10% market share in the first year, growing to 5% by year three, our SOM would be around 150,000 users in year one, growing to 750,000 users in year five.
Based on the subscription model of our app, we estimate that the average customer will pay $10 per month, and our revenue will come from a 30% take rate from the app stores. Using these assumptions, our estimated revenue for the first year would be $6.1 million, growing to $30 million in year five.
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