Is Your Market Big Enough? 3 Steps to Assess Your Startup’s Market Size

Even with a great idea you won’t go too far if there isn’t a big enough market that allows your startup to grow significantly. That’s why you should assess the size of the opportunity you’re working on, since the very beginning.

MARKET SIZE IN 3 STEPS

Certainly, there are several ways to estimate your startup’s market size and you should look for the most reasonable methodology in your case. The most important is to work on some kind of logic. Here, we’ll base our logic on 3 well-known market concepts: Total Addressable Market (TAM), Served Available Market (SAM) and Target Market.*

Hey, wait! To make the most of this learning, I’m providing you a Free Spreadsheet, so you may fill in the information about your startup to generate your own numbers! 

Market Size Spreadsheet

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1. Total Addressable Market (TAM): The Big Picture

It’s the overall market for products and services that perform the same job as yours.

TAM - Worldwide MarketTo illustrate that, we’ll follow an example.

Let’s say we had a business idea to produce and sell sustainable shoes for executive men. In that case, TAM will consider the total number of people who buy shoes in the world or the total amount of money spent on shoes per year.

Therefore, we’ll consider the worldwide shoes production: 23 billion pairs of shoes.¹ (I’m considering “production” because there weren’t specific data for “consumption”, so let’s say it is something around that number).

Of course, TAM doesn’t say much about our specific market size, yet. However,  it will make clear for you (and for anyone else) how big the consumption for that kind of product is. Besides that, it will reinforce the coherence of all your following numbers too.

2. Served Available Market (SAM): Geography and customer profile

This is the portion of TAM that you’ll work to serve in the next years.**

Now, you’ll take into account the restrictions based on the geography you’ve chosen (e.g., India, US, Brazil, North America, Europe, etc) as well as on your customers profile (e.g., women vs. men, high income vs. low income, etc).

In our example, let’s consider we decided to focus on the indian market, in the first years of our startup. Obviously, the size of the sustainable shoes for executive men in India market (SAM) is much smaller than the worldwide shoes’ market (TAM).

Probably, you won’t find a report or any other source that will provide you the information for SAM (once it is very specific). Considering that, you’ll need to search for the best numbers about each one of SAM elements.

In our example:

    1. Workforce in India: 511 million²
    2. White collar workers: 14.9% = 76.1 million²
    3. Men workforce: 75.5% = 57.5 million³
    4. Consumers willing to pay more for eco-friendly products in India: 66% = 38 million4
Eco-friendly White Collar Men Workers in India
SAM of Sustainable Shoes for Executive Men in India

As you’ve noticed in the numbers above, we’ve consider one available absolute number (workforce in India) and derived the other relative numbers by considering their percentages.

Therefore, we may assume SAM is around 38 million executive men that work in India. This is the market in which we’ll plan and play our short/medium term moves.

But, will we be able to get all these customers in just a few years? Of course…not. That’s why we must define our target market.

3. Target Market: Marketing Budget and Customer Acquisition Cost (CAC)

It’s the portion of SAM you will actually be able to get in the next years, considering your resources and the cost to get new customers.

For this last number, you should consider the financial resources you have (or will have if you’re counting on funding) to estimate how much of SAM you’ll probably be able to acquire.

Target MarketMarketing budget: people won’t buy from you if they don’t know your product exists. That’s why you’ll have to spend some money to make that happen. Consequently, the size of your marketing budget will influence directly on the size of your target market estimate.

Let’s say in our example, we have a marketing budget of $50,000/per year. What does that number mean in terms of new customers? To estimate that, we still need to know how much we have to pay to turn someone into our customer.

Customer Acquisition Cost (CAC)***:  At the very beginning of your venture, this is one of the most difficult estimates you’ll need to find. Have in mind that CAC will become clearer after you start doing tests with your marketing channels. That’s why the sooner you start testing the better. For this very first estimate, you may look for benchmarks or available statistics on CAC****

In our example, let’s consider we pay $20 for each new customer.

With our marketing budget of $50,000/year and our CAC of $20/new customer we may estimate our target market is something like 2,500 new customers per year (i.e., marketing budget divided by CAC).

AND NOW?

After generating your numbers, you may conclude your market is not big enough because:

  1. Your SAM is too narrow: maybe there aren’t many people worrying about solving the problem you’re tackling. In that case, you may consider adapting your product to address different markets or customer profiles.
  2. Your Target Market is too narrow: your estimate for acquiring customers from SAM may be a too low number. If this is the case, you may either try: raising the amount of money you have for marketing budget or lowering customer acquisition costs.

MARKET SIZE AND A REAL STARTUP CASE

One great example of how a startup adapted its product for B2B market–when noticing B2C market size was still not big enough–comes from the french startup XXII Group (check the interview with Dam Mulhem, XXII’s co-founder):

We really wanted to test and we saw that there was not enough consumers to buy products in VR for consumer. I think we only sold like 5.000 of our game and we took maybe one year, with five or six people working on the game. So, the return on investment was not there. But, when we took the same people working with Saffron, L’Oréal, Bouygues… then we had projects. So, the traction for companies was here and is still here.


* You may find other terms to define the three kinds of market we’ve covered in this post. Feel free to use the terms and methodologies you think would best fit to your needs.

** I suggest your estimates focus on a period from 3 to 5 years

*** CAC is a dynamic number and once you start testing your marketing channels you’ll certainly need to update it. Yet, you’ll get different CACs for each marketing channel you use. I’ll will better explain CAC in a future post. 

**** Example: https://www.statisticbrain.com/average-customer-acquisition-costs-by-industry/


  1. https://www.worldfootwear.com/news/worldwide-footwear-production-reached-230-billion-pairs-in-2015/1817.html
  2. https://www.manpowergroupsolutions.com/twi/market-report?market=India
  3. https://data.worldbank.org/indicator/SL.TLF.TOTL.FE.ZS
  4. https://www.statista.com/statistics/590927/share-of-consumers-who-were-willing-to-pay-more-globally-for-sustainable-goods/

Please, let me know your opinion about this post, spreadsheet or both! 🙂

Alex

Alexandre Azevedo

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