Knowing your startup’s market size allows you to find out just how big your company can be. Without knowing your market size, you could end up conducting business in a market so small, that there is very little money to be made.
What is “Market Size” Anyway?
Market size is the amount of money that is currently being spent on a particular product/service. If you plan on raising money from investors, playing in a large market is a must! This is because investors want to get a large return on their investment.
If you want a to create a lifestyle business then having a smaller market would be just fine. You just want to know what you’re getting yourself into.
Here is a quick way to determine the size of your market and determine how much money your startup can actually make:
1. Identify the broader spending
All of the spending worldwide for a product/service is what is known as the “Total Addressable Market”. So if you are starting a soap store your total addressable market (TAM) would be annual spending for soap worldwide.
Let’s get real though. If you started a soap store everybody in the world isn’t going to buy soap from you. 😔 Even so, you still need to know how big your market is as this will give you a better idea of how much room you have to grow.
Here’s how you do it:
Think about what your product or service will do.
The first thing that you want to do is get down the bottom of what your product/service is. This means we need to cut all the marketing talk and get to the root.
– We are going to make it easier to do tax preparation
– We will offer cheaper shared rides
Do a google search to find how much is currently spent on these product/services today.
Now that you have isolated the product/service, you can do some research to see how much people currently spend on it.
Here are some search terms that you can use:
–Annual spending on taxes preparation
–Market size of tax preparation
If your product/service isn’t popular yet then identify the alternative solution that exists today. Doing a google search for shared rides might not pull up anything, but we could easily do a search for annual spending on taxis.
Using the search term above I found an article stating that Americans spend more than 8.9 Billion dollars on “Tax Compliance”.
Sometimes you will find that term you’re searching I.E “Tax Preparation” isn’t the correct categorization of that market. Do some due diligence and make sure that you are referring to the market as per industry standards.
2. Identify the group you’re targeting
Now we want to identify the segment of the market that you can realistically acquire.
In a previous post, we talked about identifying your initial target market. This is the group of people that you will initially market your product/service to. This is the group you want to use when finding the Serviceable Obtainable Market.
SOM or Serviceable Obtainable Market is the portion of TAM that you can capture.
It’s important to note that this isn’t the same group that you are initially going to sell your product to. I’ll explain..
We built a product that helps colleges and universities increase alumni contributions. Instead of targeting all colleges/universities we decided to segment the market down to HBCU’s which have an urgent need to increase the contributions of alumni.
All HBCU’s and their alumni is the group we will use when calculating our Serviceable Obtainable Market. However, we didn’t start by trying to sell to every HBCU and their alumni.
Instead, we picked one school and we limited it to alumni who graduated in the last 20 years.
The alumni who graduated in the last 20 years wouldn’t give us an accurate depiction of the market we can really capture. All HBCU’s and their alumni would paint a better picture. So you want to make sure you separate the two.
Here’s a quick way to find this group:
1. Look at the larger market we identified in step #1
2. Segment it down to the group that you can realistically capture
3. Segment it down again to the group that you have the most access to
#2 is what you want to use to do the calculation in the next step.
3. Estimate the price of your product
This will require some research on your part.
A quick way is to find out how much people are paying for products similar to yours. You could price yourself as the same or less just to get an estimate.
We aren’t going to dive much into pricing strategies, but using competitors as a benchmark will give you an idea of what your market is willing to spend for your product/service.
4. Do the Math
Take the number of people identified in your target market and multiply it with the price of your product/service.
Now you may be saying “What if I don’t know how many people are in my target market“?
Just estimate it…
Nobody is going to hold you to the exact dollar amount, but you do need to able to explain how you got there.
By doing a google search we found there were ~100 HBCU’s in the U.S. with an average of 500 students graduating every year.
If we take the last 50 years then we get 2.5M graduates (100 HBCU’s * 500 Graduates * 50 Years).
So if every graduate donated $100 per year then our Serviceable Obtainable Market would be $250M.
5. Do a Sanity Check
Given that there are probably others that are targeting the same demographic as you, 100% this of won’t be yours either.
You just can’t catch a break huh?!
Be conservative when it comes to this number. A good rule of thumb is to keep your SOM around 1%- 2% of the total addressable market, or you may raise some eyebrows.
Calculate Percentage of Total Addressable Market:
Size of Your Serviceable Obtainable Market (Step #4)/ Size of Your Total Addressable Market (Step #1) * 100 = Percentage of Total Market
Remember your goal isn’t to capture a specific percentage of the market. You just want to calculate the size of the market you’re targeting.
We say that because it’s common for startups to go after a small piece of a huge market instead of finding a small segment of that market and dominating it.
Do the latter.
How big is your Serviceable Obtainable Market? Let us know in the comments below.