Market Sizing Template

Market Sizing Template

Founder's Copilot

Leverage this template from Founder's Copilot to do a quick back of the envelope market size calculation.

🎯 About This Template 🎯

Why Market Sizing?

Estimating our market size helps us as founders determine if there is enough demand to support our business idea and have an estimation of its revenue potential. By the end of this exercise, we will know which market we want to focus on and why, as well as which sales targets to achieve in the next months.

📏 How to Market Size? 📏

To correctly identify the size of your market we use a 3-step process:

  1. Define the market we address and which potential competitors we will face.
  2. Collect market size data through primary or secondary research.
  3. Segment the market depending on how realistic it is for us to achieve the market potential. This is done by using the TAM, SAM, & SOM analyses.

📋 What Is Included in the Market Sizing 📋

💡 Concise overview of the market we are addressing: To assess the size of your market, you need to first define who your potential customers and competitors are.

🔍 Methods to run research: From industry reports to customer interviews, choose which market research approach is most suitable to calculate the size of your market.

🚀 Assess the different potentials of your market: Identify how much revenue you could achieve in your market depending on how realistic it is to obtain it. Set realistic revenue targets and create a growth roadmap.

The Market Sizing

Step 1: Run Market Research

Since market sizing is all about understanding how much revenue is potentially generated in the markets we’re addressing, we need to collect information about how big the market is in terms of the number of potential customers and how much they would be willing to invest for our solution.

To do so, we need to first decide whether primary or secondary research is suitable for our goals.Primary research involves collecting new data directly from potential customers through surveys, interviews, or focus groups (e.g.: with SurveyMonkey).

Secondary research uses existing data and sources, like industry reports, articles, or online databases (e.g.: Gartner, Forrester, Statista, OECD, The World Bank, Eurostat, CIA World Factbook, etc.). Secondary research takes usually less time, but might not be as accurate as if you do the research yourself or detailed enough for your specific needs (for example you want to know how much your potential customers spend today on a particular service).

Step 2: Estimation of the Market Size

Total addressable market (TAM)

The total addressable market formula is:

📌 The average revenue per customer  X  N° of potential customers in the targeted market.

To calculate the TAM, we can use three approaches:

  1. Top-down:✔ We check how many potential customers exist within our market through industry reports, articles, or online databases.✔ We multiply the number of potential customers times the average revenue spent per year for the service or product we’re selling.
  2. Bottom-up:✔ We focus on a small subset of companies we know in the market (for example a  competitor or set of competitors in the market) and see their market share.✔ We look at their projected revenue until the end of the year.✔ We extrapolate this information to the rest of the market we target.Note: Even if the bottom-up approach uses some proven data points, the assumptions made to extrapolate this information to the total market can lead to unrealistic scenarios.
  3. The value theory:When it’s difficult to calculate how much the average willingness to pay from our customers because our service is offering something different or it significantly provides more value to our customers, we might opt out of this method. In this case, rather than basing ourselves on the existing revenue spent, we consider the customer's willingness to pay for our services and products. Here running a survey could provide you and other stakeholders with a more reliable source for this type of estimation.

Calculate your TAM:

✏️ Example: There are a total of 599,686 SMEs in Switzerland (Source). With an average revenue of CHF 500 subscriptions per year, the TAM for our example SmartBooks - AI-Powered Accounting Solution is estimated at CHF 300m in Switzerland.

Serviceable Available Market (SAM)

The SAM is a continuation and extension of the bottom-up approach used for TAM. SAM represents a more realistic and tailored estimation of the potential market for our product. It is based on our ability to reach and the features offered to realistically service all our potential customers. This is the niche we are currently targeting.So from all potential customers, which are those realistically within our reach and would buy from our solution (as it is now)?

Calculate your SAM:

✏️ Example: Based on a TAM of USD 300 m above, make a list of the companies you can realistically tackle first (e.g. we can reach 20% which results in a CHF 60m SAM).

Service Obtainable Market (SOM)

The SOM (also known as Share of Market) represents the portion of the market that our company's products or services are currently serving or that we can capture within the short term.This evaluation becomes more significant once you have entered the market, as it will play a crucial role in evaluating your startup's potential and future prospects. SOM is determined by multiplying the previous year's market share with the current year's SAM. While SOM is usually zero until your business enters the market, it can be estimated for pitching purposes by creating different scenarios (best case, realistic case, worst case).Here we should ask ourselves how many customers can we win during the first year after the launch, and why we believe this is realistic.

Calculate your SOM:

✏️ Example: For our example SmartBooks - AI-Powered Accounting Solution we will focus on Scaleups which are more receptive to innovative solutions. We plan to reach 100 customers in the first year which results in a revenue of CHF 50,000.

Step 3: Key Takeaways

✏️ Example: We cannot convince the customers to replace the existing solutions in place, the value-add is not strong enough.

When looking at your TAM & SAM, as well as the different scenarios of your SOM, please take the time to reflect on the following elements.

Are the TAM & SAM sizes big enough to justify our future resource investments?

✏️ Example: Every SME has the need to streamline their accounting. The market is big enough. A strong focus should be placed on which segment to target first, e.g. Scaleup who are receptive to new solutions.

Why do we realistically believe we have a big enough market (TAM & SAM)?

✏️ Example: Every company has a need for accounting software. It will be important to create a strong position to highlight the difference to existing incumbents.

How confident are we in reaching the realistic scenario of our SOM? Why so?

✏️ Example: Yes, we believe it is realistic because we have an existing network for our target audience, e.g. CEOs at Scaleup companies.

What could possibly hinder us from achieving the worst-case scenario of our SOM?

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