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market size

The market size for a product or service is the total revenue or total possible revenue from all sales of the product or service, regardless of who is selling.  In other words, it is an estimate of the total amount of money spent on a particular product or service. For the most part, if you are a US-based company, you only need to find the market size for the product or service in the US.  You can often extrapolate the rough size of the market for the entire world by applying a multiple of 2x-4x to the US market size.  Further, most investors will not require an estimate of the worldwide market size.

Estimating the size of the market for your product is critical to understanding the potential of your new business and convincing investors to invest.  Understanding the size of the market will also give you a good starting point for developing revenue projections which is a critical part of your business plan or fundraising pitch. 

developing market size estimates

Generally, the best way to find a market size is to find a reputable source that cites the market size.  There are several ways to do this:

• Use Google.  You can often find the size of market by using the right queries in Google.  For example, as I was composing this article I tried to find the market size for bread in the United States.  I typed the following query into Google "market size for bread" and Google returned the following screen.  The first link in Google included the following: "Market Size and Growth; Retail Sales Approach $19B in 1995."  So the market size for bread was $19B in 1995.  While this data is years out of date, the article also provides a growth rate that you could use to extrapolate the market size to the current year.  Also the market size for bread is probably not going to change very much year over year.  Perhaps more importantly, the first link led to a site called PackagedFacts.com that has market data on all kinds of consumer packaged goods.  This is another source for reliable market size data (see below).  Here are some query tips for searching for market size data in Google.  Try using the following phrases
  • "Market size for [insert your product or service]"
  • "Total US revenue for [insert your product or service]"
  • "Total revenue for [insert your product or service]"
  • "Total sales of / for [insert your product or service]"
  • Or you can search for "Industry Association [insert your product or service]"  then when you find the appropriate industry association search the site for market research.  Most market research will contain an estimate of the market size.
• Industry Association Websites.  Most industries, or markets, have an industry association.  These are groups funded and put together by businesses in the industry and by other industry observers or service providers.  These associations create networking opportunities for members, information and research sharing sources, and sometimes set standards and self-regulation policies for the members.  For example, the American Bar Association is an industry association for the legal profession in the United States.  Most of these industry associations will have conducted some market research including finding the market size.  Once you get to the right industry association site, look for "market research" or "publications" where you can generally find market size information.  Here are some links to lists of industry associations:
  • Weddle' List
  • Google's List
  • Yahoo's List
  • Wikipedia's List
• Market Research Firms.  There are a group of reliable firms that provide estimates for the market sizes of multiple markets including some obscure, small, or high-growth markets.  For the most part, these firms are focused on technology markets but there are some who focus more broadly.  Here is our list of the most reliable:
  • Gartner
  • IDC
  • Forrester
  • Yankee
• Equity Analyst Research Reports.  Investment banks provide research on public companies for their customers.  This research is designed for those are considering investing in a company's stock.  There are online aggregators of these research reports but most of them are expensive subscription services.  You can sometimes get access to them at your local library or at a business school library.  You might also be able to find a friend who has access one of these services and ask her to provide you with one report.  You want to look for a report on a public company that is as close to your company as possible.  Then you want to find an "Initiating Coverage" report on that company.  Here are some common online subscription services:
  • CapitalIQ
  • Thomson Financial (including InvestText)
  • Bloomberg

You can also build your own market size estimates.  In general there are two approaches:

• Top-down estimate.  This is an approach where you start with a known large market size, like the size of the US GDP, the size of healthcare spending the US, or some other very large market size that is known.  You can then apply percentages based on some research or experience that you have to "carve up" the known large market size into a smaller estimate of the market size you are looking for like the market for Medical Devices.  You might estimate that Medical Devices represent 2% of the market for healthcare products and services in the US.  Based on this, you might be able to estimate the market Medical Devices in the US.
• Bottoms-up estimate.  This is an approach where you start with known components of a market and combine them in such a way to develop an estimate for the market.  You can often start by estimating the number of customers or the number of purchases and then multiply that by an estimated average price per customer or per purchase.  For example, you might estimate that there are 300M people in the United States and that approximately 5% of them will purchase some kind of medical device.  This would imply that 15M people in the US have a medical device.  You might estimate that the average user of a medical device buys on average 2 devices.  This implies a total of 30M medical devices.  You might also assume that the life of a medical device is 3 years, so that would imply that 10M medical devices are sold every year (30M divided by 3).  If the average price for a medical device is $5000, then the market size for medical devices in the US is approximately $50B.  Medtronic, one of the largest sellers of medical devices, has annual revenues of $16B.  Given that Medtronic probably doesn't have a 32% share of the US market for medical devices ($16B divided by $50B), we have probably underestimated the market.  But this gives you a good sense of how to go about developing a bottoms-up estimate. 

As you can tell by how unreliable and difficult it is to develop your own estimates, it is better if you can find a more "official" estimate.  That said, you often need to take "official" estimates with a grain of salt, since these officials often use top-down and / or bottoms-up methodologies to develop their own estimates.

TAM and SAM

You might also have heard of TAM and SAM.  TAM stands for Total Addressable Market and SAM stands for Served Addressable Market.  TAM refers to the total market if everybody who could buy actually bought the product or service in question.  SAM refers to the actual number of people who are buying the product or service now.  These are just different ways to calculate a merket size.  The SAM is generally used in official business projections.

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