What is a Market?
Many first-time Entrepreneurs struggle with defining a ‘Market’.
A market is a mechanism through which a company delivers and sells a product/service to their customers.
- B2C: If you are buying raw material from say 10 companies and selling a packaged product to 10,000 users, then those 10,000 users are your target market.
- B2B: If you are collecting data from 10,000 users and selling data to 10 companies, then those 10 companies are your target market.
There maybe Multiple Markets for the product Service. See Customer Segmentation Model to identify those markets.Identify the Customer Type and Functions they would use the product for and try building a model like this:
What is Market Sizing?
Ever thought/heard questions like:
- How big is the used mobile phone market in India?
- What is the market opportunity if you introduce a new clothing line in India?
- What is the market opportunity of launching a cab aggregator in India? How did Jugnoo grow against Uber/Ola in India?
Market Sizing is a method of evaluating the potential reach and revenue of your product/service.
Market Sizing is Divided broadly into 4 Categories:
1. Market Potential:
Assuming 100% market Share, the total potential value of product/service sold over a specified timeframe.
2. TAM (Total Addressable Market):
The potential value of Product/Service sold to a particular customer segment.
3. SAM(Serviceable Available Market):
The total value of Product/Service that can fulfill the demand of a segment using a one revenue stream/channel.
4. SOM(Serviceable Obtainable Market):
The total value of SAM divided by the expected percentage market share that the company can capture.
Why is it Important?
- Quantify the sales or profit potential of new product markets or customer segments.
- Identify product lines and customer segments with lucrative growth opportunities.
- Helps validate Business Model hypothesis.
- Specify competitive threats and develop strategic responses to those threats.
- Develop exit strategies or pivot points for the future.
- Important to Investors: They want a scalable product addressing a large enough market to get the most bang for their bucks. Listen to them.
How to use Market Sizing:
First, let’s ascertain the Quantifiable Values that we are looking for:
- Value: Total value of clients/products in the market.
- Units: Total Number of clients/products in the market
- Market Share: % of clients/products acquired/sold by your competitors vs total value/units.
Market Sizing Approaches:
- Top Down: This type of sizing is done generally by using Demographical data like Company size, industry, location or Human Population, Age, Income etc. Base your hypothesis on a large number and work your way down from there. You can segment the market the way it best suits the business.
- Bottom Up: Identify the Micro segment or the niche market you are targeting and extrapolate the numbers till you reach an appropriate scale. Eg: Calculate how much an average person spends a day in the office cafeteria, and now multiple it by the number of employees and number of working days in a month/year.
For both approaches, include price at the last step. We recommend using both methods to try to solve the problem. Both approaches might produce different results, but in general, they should be close enough to triangulate on a more accurate answer.
Market Sizing Techniques:
- Product Market Analysis:
Working Excel model here.
- Market Sizing using StartupFlux: (Video Demo coming soon)
– Slice the market using Location (city, state, country, continent)
– Select an Industry
– Select a value chain eg: manufacturing
– Add more data points: like the number of employees or social stats
– Get the Number of Companies matching the criteria
- Spending Data:
Research firms and analysts publish numbers on how much companies/people spend on product/services over time.
- Census Statistics:
Government and public/private companies publish a lot of data about customer demographics, list of registered companies etc that can be used to estimate the market size.
- Market Projections:
Consider the estimated growth rate of the vertical/segment to identify if it is growing or declining. This would give a rough idea of how difficult or easy the market could be to penetrate. Google Search for market analyst, research, and consulting firm estimates to get reliable numbers.
Market Sizing is important to confidently answer several key questions that a business needs. We hope that these approaches and techniques help identify the right target market and price point.
Let us know if we can help in any way. Comment below or drop us an email. Happy to help. 🙂