How to Create the Market Sizing Slide in Your Pitch Deck: Market Sizing 101

The Importance of Market Sizing

Market sizing is more than just a metric—it's a cornerstone for strategic decision-making. Businesses rely on market sizing to evaluate opportunities, allocate resources, and convince stakeholders of growth potential. Whether entering a new market, launching a product, or seeking investment, knowing the size and scope of your market clarifies the playing field.

Key Benefits:

Strategic Clarity: Helps determine whether to invest in a market, focus on niche segments, or pursue a broad audience.
Resource Allocation: Guides budgeting for marketing, sales, and production.
Investor Confidence: Provides a data-backed basis for investment decisions.

A tech startup entering the online education space can use market sizing to decide if targeting K-12 students versus adult learners offers higher potential returns. It aligns their growth strategy with the most lucrative market segment

Understanding Market Sizing

Market size quantifies the total revenue potential of a market for a specific product or service. It’s typically assessed through three interrelated concepts: Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). Together, these metrics provide a framework to evaluate the scope of market opportunity and identify a realistic share your business can capture.

To estimate the Total Addressable Market (TAM) for a product or service, there are a few key approaches and methodologies used, depending on the level of detail and the data available.

Top-Down Approach: This method starts with broad, industry-wide data and refines the estimate to focus on your specific target market. Typically, it uses existing reports, surveys, and public databases, making it faster and less resource-intensive. However, this approach can lack precision, particularly for niche products, as it relies heavily on generalized data, which may overestimate the potential market size. For example, you might begin with a global market size for your industry and then adjust based on geographic and demographic factors specific to your target audience. The advantage here is speed, while the disadvantage is potential inaccuracy due to generalizations.
Bottom-Up Approach: This is a more granular method that begins by estimating the number of potential customers or units that could be sold, using primary data like sales data, surveys, or customer interviews. For example, if you're selling a software product at $100 per month, you would calculate the number of businesses in your target market and multiply by the subscription rate. This approach is typically more accurate because it is based on real customer data but can be time-consuming and resource-intensive. It allows for the inclusion of factors like customer behavior or market dynamics, making it a more reliable method when you have access to detailed internal data.
Value Theory Approach: This method focuses on the perceived value of your product or service, rather than just the market size. It estimates the TAM based on how much customers are willing to pay for the value or savings your product delivers. For example, if your product helps customers save 1,000 labor hours annually, you could estimate the savings' dollar value and set your pricing accordingly. This approach is often used for new, innovative products where there isn't yet sufficient market data available.

Each of these approaches has its strengths and weaknesses. The Top-Down approach is useful for a quick, high-level estimate, especially in a mature market with available data. The Bottom-Up approach, while more accurate, requires gathering primary data, which might not always be feasible for startups or businesses without access to detailed market insights. The Value Theory approach, while less common, is particularly useful for unique products that provide specific cost-saving benefits.

By combining these methods or iterating across them, businesses can refine their TAM estimates and create more reliable forecasts for strategic planning and investment decisions.

Decoding TAM: Definition and Methods to Calculate

TAM (Total Addressable Market) refers to the total revenue a company could generate if it achieved 100% market share in its industry.

Methods to Calculate TAM (Market Sizing):

Industry Reports: Use third-party data from sources like Statista, IBISWorld, or Gartner to determine the overall industry value【9】.
Revenue Per User (RPU) Analysis: Calculate TAM by multiplying the average revenue per user by the total number of users. Example: For a streaming service with a global audience of 500 million and average annual revenue of $50/user, TAM = $25 billion.
Comparative Benchmarks: Use similar products or competitors' performance as proxies for your TAM.

Common Challenges:

Overestimation: Including irrelevant audience segments inflates TAM.
Data Availability: Reliable, granular data may not always exist, requiring proxies.

Key Tip: Defining TAM correctly requires clearly identifying your industry. Overestimating by including irrelevant segments (e.g., targeting all adults for luxury products) is a common mistake.

Defining SAM: How to Determine Your Realistic Market Reach

SAM (Serviceable Available Market) narrows down TAM to the portion of the market that aligns with your business's product, geographic reach, and capabilities.

How to Determine SAM (Market Sizing):

Assess Market Competition: Consider the availability of substitutes and alternatives.
Segment the Market: Identify customer groups your product directly serves. For a SaaS business, SAM might exclude regions with low internet penetration.
Exclude Non-Serviceable Areas: Remove geographic or demographic segments outside your operational scope. Example: A food delivery service would exclude cities where it lacks operations.
Assess Feasibility: Consider factors like distribution, infrastructure, and cultural preferences.

Example: For an online education platform launching in Vietnam, SAM includes only the revenues possible within the country, considering internet penetration and local demand.

Calculating SOM: Estimating Your Attainable Market Share

SOM (Serviceable Obtainable Market) is the realistic revenue a business can capture, considering competition, marketing, and operational constraints.

How to Calculate SOM (Market Sizing):

Evaluate Market Share: Use competitive analysis to estimate what portion of SAM you can capture. Example: If SAM is $1 billion and your competitive analysis suggests capturing 5%, SOM = $50 million.
Adjust for Constraints: Consider production capacity, marketing budget, and distribution reach.
Test and Iterate: Use pilot launches or regional rollouts to validate your SOM assumptions.

Example: If SAM for a niche fitness app is $20 million in a region and your differentiated features position you to capture 10%, SOM = $2 million.

How to Determine Market Value (Market Sizing)

When data is scarce or unreliable, estimating market value requires creativity and combining multiple approaches:

Proxy Data: Use data from adjacent industries or regions with similar characteristics. Example: Estimate demand for reusable water bottles in a country by using data from similar eco-friendly products.
Customer Surveys: Gather insights from target demographics through polls or focus groups to estimate potential demand.
Triangulation: Combine multiple sources, such as public reports, competitor analysis, and consumer behavior studies, to create an informed estimate.
Expert Consultations: Industry experts, analysts, or consultants can provide valuable insights when primary data is scarce.

For instance, if launching a pet grooming service in a new city without direct data, you might extrapolate market size using national averages for spending on pets, adjusted for the city's population and income level.

Market sizing is as much an art as a science. By leveraging top-down and bottom-up methods and focusing on TAM, SAM, and SOM, businesses can build robust strategies even in the absence of perfect data. For startups and established companies alike, understanding these metrics is a cornerstone of successful market entry and expansion.