The Two Best Methods for Market Sizing Your Business, Plus Expert Tips

When considering a new venture, you must understand: “What is market size?” More specifically, you need to know your venture’s potential market size. But “Why?” I hear you ask.

Picture this: You’ve put in months of hard work only to realize that 100 people in the U.S. will potentially buy your product.

The potential revenue from that population size may be worth your product’s manufacturing, production, and distribution costs — or it may not.

But even if you’ve got 10,000 potential customers, you still need to go deeper in your market sizing to understand whether there’s a viable market.

Below, I’ll share methods to calculate your market size and accurately measure your business’ revenue potential.

I will also share first-hand experiences from founders, CEOs, entrepreneurs, and more who spoke to me about their market sizing journeys.

Keep reading, or jump to the section you’re looking for:

When market sizing, you’re calculating customer numbers to measure the growth potential of your business.

Why is market size important?

There are several reasons why every business should spend time sizing its market:

• Market sizing helps you determine whether your product is a worthy investment. The latest data from the U.S. Bureau of Labor Statistics (BLS) finds that 23.2% of private sector businesses in the U.S. fail within the first year. Businesses fail for many reasons — however, miscalculating product demand (or not calculating it at all) is one of them.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners and investors.

Real-world example:

“We first identified who fits into our target market so we could figure out an ideal market size,” says Michael Nemeroff, CEO and co-founder of apparel eCommerce brand Rush Order Tees.

Nemeroff says the brand considered business leaders, schools, sports teams, and event organizers their primary targets because they create customized apparel and other products. Because the team operates virtually, that market can extend as far as shipping is availability.

“The biggest challenge was accounting for differences across regions because of population density, event frequency, business hubs, etc.,” Nemeroff adds: “It’s a bit of a guessing game, but you’re making educated guesses that help you understand the viability of your idea and start planning your budget.”

According to Nemeroff, “it would be terrible to overshoot your market size considerably then overspend on a market where the juice isn’t worth the squeeze.”

• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and its needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set realistic goals, assign resources, and refine your strategies.

Real-world example:

“Skipping market sizing can lead to costly mistakes,” says Logan Mallory, vice president of marketing at Motivosity, an employee recognition and rewards platform.

“Early in my career, I was a part of a startup that did not prioritize market sizing. We anticipated that our product would appeal to a large number of people, so we spread our marketing efforts excessively thin.”

Mallory continues, “As a result, we wasted resources on low-conversion areas while passing up more lucrative prospects. If we had done comprehensive market sizing, we could have identified and targeted high-potential sectors from the outset, maximizing our budget and generating faster growth.”

• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market Size vs. Market Value

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to a company or industry’s financial worth or estimated market capitalization. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Market Sizing Terms to Know

Before figuring out your market size, there are a few helpful terms you should get to know.

Total Addressable Market (TAM)

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base a company could achieve if it captures 100% of its market share.

Serviceable Addressable Market (SAM)

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company’s resources, capabilities, and target customers.

Serviceable Obtainable Market (SOM)

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

Check out this post to learn more about TAM, SAM, and SOM and how to calculate them.

Target Market

A target market is a specific group of customers, industries, or segments a company focuses on. It‘s the customer segment most likely to show interest in, purchase, and appreciate a company’s products or services.

Penetration Rate

Penetration rate refers to the percentage of a target market a company has successfully captured. It shows the level of market share a company reaches in a specific market segment or overall market.

Pro tip: If you’re a new business, you can calculate the penetration rate by dividing your total customers by the number of potential customers in the target market. Then, multiply the result by 100 to get the percentage.

Learn more about market penetration here.

Market Segmentation

Market segmentation means dividing the total market into distinct groups or segments. Usually, the people in these segments have common characteristics, needs, or behaviors.

Segmenting the market can help you better understand your target customers. It can also help you tailor business strategies, like marketing, to meet specific segment needs.

Value Proposition

A value proposition is the unique benefits that a company offers to its target customers. It differentiates a company’s product or service from competitors and creates value for customers.

Understanding the value proposition is crucial in market sizing. This is because it can help you find the specific customer segments that will find the most value in your offer.

Pro tip: Try one of these free value proposition templates to draft your value proposition.

While calculating market size requires only a few steps, it‘s a crucial process. Follow the steps below to understand your business’s potential demand and revenue opportunities.

1. Start with your total addressable market.

I know what you’re thinking! But seriously, don’t be put off by the technical jargon. Calculating your TAM is as simple as multiplying the total customers in a market by the annual value per customer.

That said, before calculating, make sure you take a look at the steps below:

• Define your product or service. While developing a product can be quick, growing a business around a product is more complex. That’s why you need to really understand your product or service, including how it solves a problem or meets a need in the market.
• Find your market category. Some products fall within more than one industry or market category. This is the first step in narrowing your TAM. So, think carefully about what you expect customers to compare your offer to.
• Conduct market research. Gather relevant data and information about your potential users. If you’re new to market research, check out this free market research kit with research and planning templates.
• Analyze the competition. Conduct a competitive analysis to determine the market share and unique value of your top competitors.

Pro tip: Getting started on competitive analysis for the first time? Heed Christine White’s (HubSpot’s former Senior Marketing Manager) words below.

“Competitive analysis is the process of comparing your competitors against your brand to understand their core differentiators, strengths, and weaknesses. Competitive analysis is an opportunity to learn from others. It isn’t copying successful competitors to the T. Trying to undercut others’ pricing. A one-and-done exercise,” says White.

• Define your total addressable market (TAM). Using the research and analysis you’ve conducted, create a realistic TAM estimate.

2. Find a group of customers to focus on within that target market.

Want to quantify the top customers in your market? Try the tips below:

• Create your ideal buyer persona. Use the Make My Persona tool to outline the characteristics, demographics, and behaviors of your ideal customers.
• Segment your target market. Start dividing your target market into distinct segments. You might base segments on age, location, interests, or buying behavior.

Real-world example: Vinay Kevadiya, the CEO and founder of business plan software Upmetrics, shared his approach to market analysis and segmentation with me.

“We first defined our market by identifying potential users of Upmetrics,” says Kevadiya. “It includes small business owners/entrepreneurs, business consultants, business schools, incubators, and accelerators.”

After this, Kevadiya and his team segmented users based on type, industry, and scale. “Group 1 was small businesses and entrepreneurs. Group 2 includes business consultants, incubators, accelerators, and business schools.”

Kevadiya adds, “Then we did a Quantitative Analysis and identified the total number of potential users in each group in the US geography. We collected this data using industry reports and statistics.”

• Continue market research. Continue collecting data and insights about each segment. This will help you understand each segment’s size, needs, preferences, pain points, and purchasing habits. Your ongoing market research might include surveys, interviews, focus groups, or analyzing existing market research.
• Set pricing for your product or service. For some products, pricing is a deciding purchase factor. So, if you haven’t already, set pricing or a price range for your products.
• Assess segments of your market and prioritize. Think about each segment‘s size, growth potential, and competition. It’s also a good idea to consider how each segment aligns with your company’s capabilities and resources.

Pro tip: Don’t just focus on segments that offer the most attractive opportunities. Make sure they align with the strengths and needs of your offering.

• Refine your buyer personas. With your prioritized segments, take another look at your ideal customer profile. This will give you a more useful buyer persona for your marketing and sales strategies.
• Confirm your SAM with market testing. Test your target segments with a product or service pilot group, measuring their responses and feedback.

3. Figure out how many of those customers are likely to buy your product.

This step will narrow your scope more intensely on the customers who need exactly what you offer. These people are looking for you or a clear alternative to your competitors. To quantify this group:

• Create a customer journey map. Through awareness to purchase, this process can help you map out the ideal customer path. From how you expect customers to discover your products to the blockers that might keep them from clicking buy, this step is helpful for market sizing and beyond. New to the process? Use these customer journey templates.
• Estimate conversion rates. Use historical data, industry benchmarks, or industry research to estimate conversion rates. This can help you quantify the expected numbers of leads, prospects, and customers in each segment.
• Figure out buyer intent. Create a ranking or score for each segment to measure their likelihood of purchasing your product. This can help you prioritize segments with the highest conversion potential.
• Create a SOM estimate with your data. The research above will add credibility to your market size estimate. It can also help guide your growth strategies.

Pro tip: Vinay Kevadiya recommends including “competitor activities” within your SOM estimate. “We have even considered the marketing and sales strategies of our competitors and estimated their reach to the number of customers,” Kevadiya explains.

4. Multiply that customer number by estimated penetration rate.

To calculate penetration rate, divide the SOM you calculated above by your TAM, then multiply by 100.

Once you have a calculation for your market size, you’ll want to make sure you can trust that number. Keep your market sizing current with these tips:

• Confirm your data is accurate and reliable. As you complete your research, use reliable sources such as industry reports, market studies, or government databases. Also, check to ensure the data you’re referencing is current.
• Keep up with market growth, seasonality, industry trends, tech advancements, regulatory changes, and economic conditions. These factors can affect both market size and customer demand.
• Review and update your market size estimates regularly. Market conditions change over time. Plan regular reviews of your market size, then update your calculations with new or relevant data.

How to Apply Market Sizing Information Once You Have It

You’ve your estimated market size — now what?

Market size helps your business answer the following questions:

• How much potential revenue can we earn from this particular market? In other words, is it even worth our time and energy?
• Is the market big enough to interest us?
• Is the market growing? Given that 36.2% of U.S. businesses fail after three years, 48.0% after five, and 65.3% after 10, you must plan for the future. Will there still be opportunities to earn revenue from this market in three, five, or 10 years?

Beyond those pressing points, how else can you apply market-sizing information to your business? You’ve done the work — you might as well get the most from the data, right?

I spoke to founders, CEOs, and entrepreneurs to find out how they used market sizing information once they had it.

Create a strategic plan.

According to Vinay Kevadiya, once Upmetrics had done its market sizing, it helped the team create a clear strategic plan.

“Lots of customer insights are gained. It involves understanding customer demographics, behavior, and preferences, which are essential for tailoring products and services to meet the market demands more effectively,” says Kevadiya.

Part of the strategic planning included building marketing and sales strategies. “Based on the groups, it is now easy to target the customers, and it helped us to plan content marketing and SEO strategies,” Kevadiya says.

Leverage unique positioning.

Axel Lavergne, Founder of Reviewflowz, a review and testimonial software for SaaS, used competitor analysis data to gain valuable insights about their business.

“We studied our competitors to determine market saturation and gaps,” says Lavergne. “For instance, we discovered that, while many companies provided review management tools, few expressly addressed the needs of small to medium-sized SaaS businesses.”

This analysis assisted Reviewflowz in uniquely positioning itself by targeting an “underserved niche.”

“As a result, we avoided overcrowded niches and focused on unmet demands, resulting in a strong market launch and rapid growth. Market sizing was more than just a formality; it helped us link our vision with market reality, ensuring we focused on the correct audience and possibilities,” emphasizes Lavergne.

Adapt product features.

“Detailed market sizing was central to our winning FinlyWealth pitch,” says Kevin Shahnazar, co-founder and CEO of FinlyWealth.com, a credit card comparison platform in Canada

Shahnazar’s team started by appropriately estimating the total number of credit card holders in Canada — approximately 30 million. They then considered only those looking for new cards or better rewards — a subset already existing. They estimated at 20% of cardholders annually.

FinlyWealth’s approach combines top-down and bottom-up methodologies. The top-down view included analyzing industry reports and government data. For the bottom-up approach, they surveyed potential users and looked at the search volume for comparison terms of the word credit card.

Shahnazar adds: “From this process, it was evident that an obtainable market of SOM around 1.5 million users annually exists. Armed with this data, we refined our platform based on the needs of the targeted markets.”

As a result, they could “Adapt product features to the most challenging needs expressed in the targeted market, enabling a 40% higher engagement rate.”

Attract investors.

Market size is a critical number to know when you‘re looking for funding. Investors will need to know how much money they have the potential to make from a given market. Additionally, it’s vital to recognize whether your potential revenue outweighs your business’ costs. But don’t just take my word for it …

“Market sizing had a significant impact on our business. It provided more accurate resource allocation, focused marketing strategies, and improved product offerings,” says Shawn Plummer, CEO at The Annuity Expert.

As an example, Plummer says his team identified underrepresented demographics and personalized services to match their individual needs, resulting in better consumer engagement and faster growth than expected.

Plummer adds, “This strategic insight also helped attract investors, as we could demonstrate a clear understanding of market opportunities and risks.”

Find new opportunities in a competitive niche.

Once you have market size, you‘ll also want to consider how saturated the market 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 figure out whether you can earn enough consumers out of the TAM to make this a worthwhile venture.

That said, marketing sizing can help you find hidden opportunities even in a competitive niche.

Teresha Aird, co-founder and CMO of Offices.net, speaks about her experience in market sizing for a competitive industry.

“When we were starting out, we knew that having a solid grasp on our market size would be crucial for success, especially in our highly competitive sector,” says Aird.

Aird’s team began by conducting thorough research to understand the total addressable market (TAM) for commercial office space in the U.S. This required analyzing industry reports, government data, and conducting a thorough analysis of our direct competitors.

“We also looked at market trends, growth rates, and the demand profile for flexible workspaces, which is a niche we were particularly interested in,” Arid says.

Aird adds, “Through the process, we identified a growing demand for flexible office spaces among startups and small businesses. This insight led to us tailoring our services to meet their specific needs, which increased our user base.”

Pro tip: Aird and the team also surveyed potential clients to gauge their actual needs and preferences, giving them more personalized data.

Market Sizing Methods

There are two simple methods for market sizing your business. These processes can help you use data to gauge market size.

Top Down Approach

The first is a top-down approach, in which you start by looking at the market as a whole and then refine it to get an accurate market size. That would look like starting from your total addressable market and filtering from there.

Market Sizing Example

Let‘s say you want to launch a wine company. First, you’d want to figure out how many liquor stores are in the United States — this helps you determine the total market to which you could theoretically sell your product.

After your research, you discover 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 decide 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 find there’s a roughly 40% success rate for wine distribution.

Using this as an example, we’d calculate the 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.

Bottom-Up Approach

A bottom-up approach is the exact opposite – starting small and working your way outward.

This involves first identifying the number of units you can expect to sell, then considering the number of sales you anticipate from each buyer, and finally, the average price per unit.

Market Sizing Example

Using the same wine example – say you found recent data showing that the average cost of a wine bottle in New England is $10. A survey shows that the average consumer buys one bottle of wine a week, or 48 bottles a year. This means that the average consumer spends $480 per year on wine.

Next, you discover that the number of consumers (or households) you can expect to reach in the New England area is 16,000.

As a result, your market size is 480 x 16,000 = $8,000,000.

I have to emphasize that both methods ignore the existence of competitors, customer churn rate, and other factors that impact sales. With this in mind, I recommend staying conservative when estimating how much of the market size you’ll win and using this as a starting point.

Real-world example:

Milind Katti, CEO and co-founder of DemandFarm, shared his company’s approach to market sizing with me.

“Our approach to evaluating total addressable market size and potential revenue at DemandFarm is both data-driven and bottom-up,” says Katti.

First, they worked out the “Ideal Customer Profile (ICP) and the distinct market segments we target.” This is followed by the “average contract values (ACVs) for each segment and the total addressable market (TAM) size of these segments, representing the number of companies that fit the segment criteria.”

Katti adds: “By multiplying the TAM of each segment by its corresponding ACV, we estimate the market size and revenue potential for each segment. Aggregating these estimates across all segments provides us with a comprehensive view of the overall market size and revenue potential.”

Market Size: FAQs

Now, I’ll answer common questions about market size.

What is the first step in calculating market size?

The first step in calculating market size is to start with your Total Addressable Market (TAM.) To calculate your TAM, multiply the total customers in a market by the annual value per customer.

What is considered a large market size?

It depends on your business and goals. However, if you’re looking to attract VC funding, a $1 billion market size is said to be large enough. But this is a symbolic target. In reality, VCs are more interested in exit size because when a company is sold or publicly listed, they’ll get a return on investment.

What is considered a small market size?

Once again, it depends on your business and your goals. However, a small market size typically means a projection of under $15 million in annual revenue.

What is a good market size for a startup?

A good market size for a startup depends on each business.

For example, a competitive market estimate for a tech startup could be between $5 billion to $500 million. However, a competitive market estimate for a local small to mid-sized business startup could be $60,000 to $500,000.

That said, the potential demand for your product or service should always be large enough to sustain growth in the first few years.

To market size or not to market size?

Everyone I spoke to experienced positive results after market sizing their business. It empowered them to plan strategically, estimate growth potential, and even thrive in a competitive industry.

Still, that’s not to say you can’t thrive without market-sizing your business. Take Andrei Serbanoiu, co-founder of Socialinsider.io, as an example. Serbanoiu never did market sizing before entering their industry.

“Looking back, it probably wasn‘t the most mature approach, but hey, enthusiasm and hard work can take you a long way! I don’t think we were even familiar with what market sizing was at that point, to be frank,” Serbanoiu says. “Now, eight years later, I wish we had as it would have given us a more grounded approach with better-set expectations for the years to come.”

Serbanoiu adds, “We‘re doing great despite not being aware of the market size we’re diving in, but I can’t stop asking myself — would we have been doing the same things if we had done it in the beginning?”

Serbanoiu and Michael Nemeroff (CEO and co-founder of Rush Order Tees) agree that market sizing is a guessing game. But at least you’re making educated guesses that help you estimate the viability of an idea.

Or as Serbanoiu puts it, “I think that market sizing helps but does not ultimately determine the path we go on — things evolve, markets grow and shrink and ultimately building a business is about taking risks and placing bets — maybe more informed bets if you do your research properly.”

Ready to tackle market sizing and beyond? Try HubSpot’s Starter Bundle Built for Startups & Small Businesses.

Editor’s Note: This post was originally published in April 2019 and has been updated for comprehensiveness. This article was written by a human, but our team uses AI in our editorial process. Check out our full disclosure to learn more about how we use AI.