Most entrepreneurs, especially at the beginning, tend to generalize the process of market sizing. During our last-year’s Startup Bootcamp held in August, we’ve made the same mistake as young founders. When our mentor asked: How big is your ideal market? We answered: Hmm… The bigger the better? All of it?
Nobody likes complex calculations, but let’s admit that market sizing plays a crucial role in startup development. Despite the fact that an idea “our product is for everyone” sounds really nice, it’s simply unrealistic. Even the largest and most famous brands in the world aren’t for everyone. As paradoxical as it sounds, we can lower the risks, if our market is as narrow as possible. Market sizing, if done right, actually gives us an ideal market for our unique startup.
What is market sizing?
In order to determine exact numbers, we first need to clarify market sizing as a term. Clarification appears in two forms:
- Presented as a number of users and sellers inside one market
- As total exchange of money in the market, annually
The second form, expressed in money, is also called “market value”.
Once we wisely observe these values, only then a proper strategy can be set. What makes startup goals achievable is a clear approach, a realistic view and the direction based on real market’s needs. Most importantly, plenty of money, time and nerves will be saved by knowing which part of global market is ideal for us!
Exact size or value of the market is presented through:
- TAM – Total Available Market
- SAM – Served Available Market
- SOM – Share of Market
Estimating market size
Though it sounds like a name of an imaginary Chinese emperor, TAM SAM SOM is actually a visual and measurable representation of the market. Starting from a widest possible view, this image shrinks all the way to the most realistic market share. That’s the one (SOM) that your startup should target.
Steps presented in this blog are just the tip of an iceberg. During the Bootcamp, estimation is based on your own, unique startup story. Depending on your vision and your offer, mentor takes you one step at the time. If we’re explaining market sizing as a term, these are the basic principles:
- TAM or Total Available Market – global, the widest possible market which your startup could potentially serve. TAM also shows the maximum potential revenue;
- SAM or Service Available Market – shows a smaller part of TAM, limited with geographical position of your startup, but also other technical and logistical circumstances;
- SOM/TM or Share of the Market/Target Market – your ideal, narrow market, as a part of SAM. It shows which market size is already served or planned to be served in near future. This is the most realistic market size a startup should go for at the beginning.
How to interpret the results of market sizing
Let’s say that we’ve calculated certain values inside our SOM/TM, as happens on each Startup Bootcamp with a “little” help of our mentors.
As always, the numbers themselves doesn’t mean anything with a context.. Precisely, TAM, SAM and SOM/TM all have different roles:
- TAM helps us realize the full potential of the startup towards we should move, but it’s not important in the starting phase; each participant in the Bootcamp from all five startup teams, was both shocked and motivated by TAM’s ginormous digits;
- SAM is different, as it shows a more easily reachable goal; SAM plays a vital role during negotiations with investors, partners, co-founders, etc.
- SOM is a short-term and at the starting point the most reachable part of a market; it enables fast and pretty secure growth because there’s no second guessing (the most common obstacle for new entrepreneurs)
Startupers often doubt their idea if growth is not as fast as they expect. But, usually an idea is not a problem. Usually, targeted market is too wide or facing the wrong direction. It’s always helpful to take some time and realistically observe the market, especially before first investments.
Next steps and strategy setting
Each startup is a world by itself. We recommend that exactly the founder, as a core idea-maker knows all details of market sizing. Most common scenario places a CEO/founder in front of investors. At this point, he or she should know the result of EMS – Estimated Market Size by heart. EMS shows the full potential of one startup company and plays a crucial role during negotiations.
Golden rule when calculating these values is: do your best to reach the most precise, not the biggest number. Truth and honesty create the foundation for healthy business development.
Next steps, as guided by Impact Hub’s mentors during our Startup Bootcamp program, are:
- EMS (Estimated Market Size) viewed from two perspectives – top-down and bottom-up; both perspectives should be shown to potential investors or partners, since that’s how the entire picture is visible with utmost credibility;
- SURVEYING – interviewing the users, otherwise known as research on-spot. One of the most effective methods of market sizing process;
- TREE STRUCTURE STRATEGY – easily viewable and logical mapping of the most important elements of market sizing;
- DCF (Discounted cash flow), market earnings multiple, and other methods we use to measure startup’s worth, equity, etc.
How market sizing makes life easier for startup teams?
As previously mentioned, startup teams gain valuable insights which only could be learned through market sizing calculations. For starters, sizing provides information that brings certainty and credibility to the table during negotiations. Investors simply view founders in a different light because of clear market data! This is the reason why pitch deck slides about market sizing can be the game-changing factor for investors.
Nonetheless, there’s more to it than numbers and money. Market sizing sheds the light on other, equally valuable aspects: target audience, geographical setting, including other specifications of each market, the real potential of our startup idea, and lastly – investment possibilities. If we go deeper into measuring, these elements will also open up:
- Clarity about the realistic goal for the next 12 months – which determines next steps in product development, marketing campaigns, etc.;
- Comprehension of our ROI – return of investment, the key component for all team members and future activities;
- Startupers can easily project their company’s value and how it could grow in time (in years or even decades);
- Important information for beginning a startup stage: through market sizing customer value becomes clear – it shows how much money needs to be invested in order to convert a single customer.
So founders, stop directing your startup in darkness and devote your time to each step of market sizing. This is how your young projects will propel! We hope you’re motivated to dive deeper into this topic with us, and if you get stuck, don’t hesitate to seek help from some of our experienced mentors.