Market Sizing

What is Market Sizing? 

Scalepath Staff
April 6, 2022

Market sizing

Market sizing is about understanding the potential revenue associated with a particular product or service. A market sizing exercise should uncover the number of likely buyers by segment, vertical, and geographic region, and the price each is willing to pay for your product or service. 

If you’re at all involved with bringing new products to market, expanding to new markets, or understanding market share, market sizing will be on your mind - or at least, it should be. 

A market sizing analysis breaks down your potential earnings in gradient views, such as your: 

  • Total addressable market (TAM) - or the sum total of all money to be made globally from the sale of your products or services and ones like them
  • Serviceable Available Market (SAM) - a more realistic view of how much of your TAM you can capture given your product and service limitations
  • Serviceable Obtainable Market (SOM) - a further breakdown of what within your SAM you can obtain given your internal limitations and target market; this often becomes your target market share 

To see how these three key pieces of how your market sizing analysis differ, take a look at the difference between TAM, SAM and SOM.

Why market sizing is important

Market sizing is hard to do well, but powerful when you get it right.

Market sizing is more than just a static group of facts and numbers - it grounds go-to-market plans in reality. Looking at your products and services through the lens of your analysis gives you a clarity of purpose and can help you spot new opportunities. The understanding you gain from a market sizing analysis equips you to better handle new challenges, setting the stage for future growth.

Typically, market sizing is important for showing investors a growth plan, building a go-to-market strategy, identifying new market opportunities, and mapping sales territories.

How to do market sizing

If you’re ready to roll up your sleeves and calculate your market size, note that you’ll need to start with your total addressable market and work from there. The methods generally boil down to two: top-down and bottom-up, and can be done by yourself, by hiring a market sizing consultant, or using market sizing software.

1. Top-Down Market Sizing

Calculating a top-down market size involves starting with the ‘top’ of the market (for example: “What’s the overall spend in this market today?” While good for an overall wind check for your potential opportunity, a top-down TAM calculation is often misleadingly simple. 

A top-down market size calculation is typically available via a third-party research firm or found in figures you may see from an industry publication, and it can help you determine if the total market size justifies your investment for entry. 

While a top-down market size calculation can give you a quick overview of a market, you’ll need further granularity to make strategic decisions based on the many factors that affect your market and product.

2. Bottom-Up Market Sizing

A bottom’s up approach is more accurate as it calculates estimated potential sales of a product or service and where possible, pulls from your existing sales data. 

A bottom’s up market size calculation will take into account:

  • How much have people historically paid for my product or service?
  • What are my potential target market segments?
  • What are my distribution channels and where are there limitations?
  • What portion of the market can I reasonably capture?

For example, if you’re a B2B SaaS company, a bottom’s up market sizing calculation could take the number of potential businesses in a market and multiply it by the annual price of your product or service.

Bottom-Up Market Size Calculation:

# 52,000 businesses - Potential customers for B2B SaaS product

x $12,000 - Price of annual contract

= $624 Million TAM

The bottom’s up approach gives a more accurate assessment of a product’s potential, but the example above needs to be refined with a more detailed understanding of market drivers, customer segments, and potential market limitations and opportunities. 

We’ve written more about the difference between top-down and bottom-up market sizing here.

Steps to do market sizing

Calculating your market size and undergoing a detailed analysis should give you a useful model rather than static figures. Your market size is changing often, so you’ll need something that can change and grow as your knowledge and experience increase.

Building that model of what your market looks like can take several different forms. There are plenty of market sizing tools to help you gather data along the way, but what you might want is a useful framework to kickstart the process. Check out our resources page for advice on how to navigate the market sizing landscape further and download our free toolkit to build a structured market sizing model yourself.

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