The 5 Methods for market size calculation (+FORMULA)

Calculated by determining the total market and then estimating your share of that market.

A typical top-down analysis might look something like this:

"I will sell a gadget that everyone can use, and since there are 300,000 people in my city, even if I manage to take 5 percent of that market, I can make 15,000 sales."

So you could estimate the market at $10 billion and say that you would take 2 percent there - which is as much as $200mn. For specifics, you can look at what percentage of the total audience our particular segment takes.

Calculated by estimating potential sales to determine total sales. The bottom-up analysis evaluates where products can be sold, and to whom they can be sold.

For example, you decide to provide a dog walking service. You can estimate based on the number of people in the city.

For example, in New York, there are 600k dogs, and only 8% of them will walk every day.

Then if your average bill is $20 then the maximum possible earnings per day will be equal to 600,000*8%*$20 = $960,000 per day.

Then the whole dog walking market is $350,400,000 per year.

However, you should consider that a large sum of money will be given to dog walkers.

Therefore, your market may be estimated at 600,000*8%*$10*365=$175,200,000.

Where $10 is what you get for walking one dog.

Although estimation with bottom-up analysis requires much more effort, the result is usually much more accurate.

Total Addressable Market or TAM refers to the total market demand for a product or service. It is the maximum amount of revenue a business can generate by selling its product or service in a particular market.

TAM is most useful for businesses to objectively assess the potential of a particular market to grow and scale.

According to the MIT Global Startup Labs program, the best way to calculate the total addressable market is to conduct a bottom-up industry analysis.

SAM determines the segment (share) of the total market (TAM) of customers who are willing and able to buy a product/service from similar business categories to yours.

For example, if you sell a software product that is needed worldwide, but you only have an Eng. version, and at this stage, you only sell in US; then SAM can be counted as TAM, but only for US, not the whole world.

There is also an even more interesting way to calculate SAM. The sum of the revenues of all competitors and the startup itself. You can find out the competitors' prices and roughly estimate how many companies they serve.

SOM is the size of the market, the share of SAM that a business can occupy given the available strategy, competitors' actions, and the company's competitive advantages. It can be a company's actual customer base or a realistic share of SAM.

You can calculate it in a variety of ways. You can divide last year's revenue by last year's SAM. The resulting percentage is the company's market share last year.

By learning to determine market share, the company can make decisions about its future strategy. And by competently providing this information to an investor, it is possible to increase the chances of obtaining investment.

1. Market Size Estimation

The market size can be estimated by multiplying the value of a particular product or service by the number of people who would purchase it. For example, if a business sells a product for $10 and estimates that 10,000 people would buy it, the estimated market size would be $100,000.

Formula: Market Size = (Price of Product or Service) × (Number of Potential Customers)

2. Penetration Rate Calculations

The penetration rate can be calculated by dividing the number of customers who actually purchased a product or service by the total population in the target market. For example, if 1,000 people purchased a product and the total population of the target market is 10,000, the penetration rate would be 10%.

Formula: Penetration Rate = (Number of Customers Who Purchased Product or Service) ÷ (Total Population in Target Market)

3. Market Share Calculations

The market share can be calculated by dividing the sales of a particular product or service by the total sales of all products and services in the market. For example, if a business’s product accounted for $50,000 of the total market sales of $500,000, the market share would be 10%.

Formula: Market Share = (Sales of Product or Service) ÷ (Total Sales of All Products and Services in Market)