The Simple 2-Step Process for Calculating
Your Market Size
When most businesses forecast their revenue goals, they first calculate their total addressable market, which is the total market demand for their industry’s products or services. Put simply, it’s the maximum amount of revenue a business could generate if they captured their entire market.
However, unless you’re a monopoly, you most likely can’t capture the total addressable market for your products or services. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your products or services.
That’s why it’s crucial to calculate the maximum amount of revenue you can possibly generate by selling your products or services to the customers who would realistically benefit from buying your solutions.
This amount of potential revenue is called your market size or serviceable addressable market, and you can use it to accurately measure your business’ potential for growth.
Your market size, or serviceable addressable market (SAM), is the maximum amount of revenue you can possibly generate by selling your products or services to the potential customers who would realistically benefit from buying your solutions. This metric helps you accurately measure your business’ potential for growth.
How to Calculate Market Size
Market Size Example
Let’s walk through an example to explore how you’d determine market size.
A Startup Wine Company
Let’s say you wanted to start your wine company. Here’s how you would calculate market size: First, you’d want to determine how many liquor stores are in the United States — this helps you figure out the total market to which you could theoretically sell your product.
After your research you determine there are 50,000 liquor stores in the United States. Of that total list, you only want to sell to the New England area — including Massachusetts, Maine, and Rhode Island.
You determine your target market includes the 1,000 liquor stores in the New England area. From here, you conduct research and speak with alcohol distributors to determine there’s a roughly 40% success rate for wine distribution.
Using this as an example, we’d calculate market size using the following formula:
1,000 liquor stores x 40% = 400 liquor stores
Then, if you assume each liquor store will result in $20,000, you can figure out potential revenue using the following formula:
400 liquor stores x $20,000 = $8,000,000
This means you stand to make $8 million if you penetrate 40% of the total market in the New England area — however, this doesn’t take into account your competitors’ wine, or all the other liquors available in any liquor store. For this reason, you’ll want to remain conservative when guessing how much of the market size you’ll win.
How to Use Estimated Market Size
Okay, you have your estimated market size — now what?
Market size helps your business answer the following questions:
Market size is a critical number to know when you’re looking for funding. Investors are going to need to know how much money you have the potential to make from a given market. Additionally, it’s vital to recognize whether the potential revenue you can make outweighs your business’ costs.
Once you have market size, you’ll also want to consider how saturated the market already is with your competitors’ products. Ultimately, you can’t capture the total addressable market (TAM) — some of those people will choose competitors’ products over yours. So you’ll need to determine whether you have a shot at earning enough consumers out of the TAM to make this a worthwhile venture.
Size Matters But So Does Knowledge
Once you have made the decision to move forward in your chosen market it’s time to gain some market knowledge. You will want to gain insight into your competition and specifically what customer’s experience when interacting with the competition. Why is that important? You have to have some leverage when you are the new guy in a market. Just opening our doors won’t cause customers to start streaming through. We can help you gain market insight through our competitive market studies to include competitive mystery shops, targeted market surveys and virtual focus groups.
We are here to help whether it’s exploring a new market or helping you gain more market share in your current market. Check out all our services at Mystery Shopper Services.
Written by Clifford Chi and Carl Phillips
Business Evaluation Services, PO Box 507, Arroyo Grande, CA 93421, 888-300-8292