How to easily determine your market size (An illustrated guide)

July 19, 2022
Tribal Staff
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If you intend to evaluate a merger or acquisition, an upcoming round of capital, or simply identify growth opportunities for your company within your industry –be it retail, manufacturing, automotive, and so on– you will need to determine the size of the market.

This can be a challenge for any company. However, understanding this figure will help you estimate your growth potential and thus make more confident decisions about where to efficiently place your resources.

To do this, you need to consider whether market value and share will be based on demand or supply. This is regardless of the method you decide to use to size the market.

This will depend on the type of information you have available or can generate with certainty. Regardless, here are several methods to easily determine the size of the market.

We will conclude with an example of how to determine market potential, presented from a practical and personal approach.

So what is the market size?

The market size is an estimate that provides us with the maximum sales potential for a given market. Calculating it is critical for a company that intends to evaluate the viability of a new product/service or the implementation of an expansion plan.

This is because, once the market potential has been calculated, it is possible to determine whether it is large enough to sustain a proposed business (or keep an additional competitor in the market).

It is important to remember that the estimated market potential sets an upper limit on market size.

Although these Total Addressable Market (TAM) sizes can be expressed in units (customers, products, or subscriptions), what we are really seeking to determine is the sales flow that would be generated by the total market.

Unless there are no direct or indirect competitors, a company will capture a share of the total estimated market potential, not all of it.

Precisely for this reason, a common practice is to start with a large and diverse population. Then, use a series of attributes to narrow the potential market to a more reasonable estimate.

This "narrowing" of the market will help identify common attributes of potential customers (age, income, geographic location, access to distribution channels, etc.).

You could also use this process to define the desired market traits of the minimum viable product you intend to market. In this way, you save money and time during the launch process; or, alternatively, you consider the possibility of withdrawing from the product market.  

Consequently, the following is a general outline of how to segment the market size and the data necessary to estimate the market potential for a business idea or a specific project:

TAM (Total Addressable Market)

The TAM shows the revenue that would be generated if 100% total market share were achieved. Based on this scenario, you can estimate the TAM by applying this formula:

This figure considers the market potential derived from particular issues or needs within a population segment.

However, it is wrong to assume that one company captures all of this amount. If it did, it would mean that there is only one supplier of this product or service in the world.

We would be talking about a pure monopoly scenario where the company has unlimited financial resources and no competition or substitutes.

It is true that there may be considerable barriers to entry for a certain type of market or industry, but globalization prevents global monopolies.

SAM (Serviceable Addressable Market)

SAM seeks to estimate the available TAM market that your company could target with its current business model, by applying this formula:

SAM, in other words, answers the question, "Which segment of the TAM would realistically purchase our products/services?".

In this context, the SAM must consider the target customer profile with its respective buying behavior and readiness to pay. The latter is a key estimation metric, as we saw in the market size analysis chart.

Thus, after performing an analysis of your customer, you will be able to delimit the realistic size of your market. With this, you will have the elements to define a purchasing/production strategy aligned with marketing and sales efforts.

The SAM is important for investors because it shows the potential of a certain business or idea in the medium term. And for the same reason, it can be used as a target for the management team.

SOM (Serviceable Obtainable Market)

The SOM is SAM's addressable market segment, which your company could satisfy according to the offer that your supply chain allows it to place. Applying realistic market sizing criteria, such as supply capacity, is an alternative way to establish conservative scenarios.

The addressable market, or SOM, is a more realistic measure of short-term opportunity than the SAM, since it contemplates those internal factors that affect your company's production capacity.

In short, the SOM, as far as tangible products are concerned, explores the material limits of your production capacity.

Therefore, it is necessary to know the production process and identify the quality requirements, prices, and distribution methods of the market.

Bottom-Up market sizing from the demand side

The Bottom-Up approach requires three basic pillars: product offering, product pricing, and customer volume. This exploratory sizing starts with detailed customer or product information and then expands to revenue.

So you will be able to answer questions such as "what are the risks of launching a new product in an emerging market?", "is there a market to support your idea or not?", "What are the obstacles to scaling up your business?".

If we take an economy with perfect information as a reference, we could use these basic components for each company in a defined market, at the product level, and thus determine the size of the market and estimate the future performance of a company.

For example, let's envision a fragmented market made up of 100 companies, each of which has comparable performance and offers only one type of product.

Suppose we could measure the performance of only 25 companies with public information. Then we would know that, on average, they could sell 100 subscriptions per month at MXN$150 per transaction.

In that case, it is possible to infer with this metric the performance of all 100 companies, which would lead us to estimate an aggregate market size of 100 companies X MXN$15,000 monthly revenue X 12 months, for an annual market size of MXN$18,000,000.

Depending on the level of detail of the market research, we may be able to add other assumptions, such as returns, refunds, exchanges, retention rate, and other comparables with competitors in the market.

However, you should always keep in mind that many companies are privately held and do not share performance data. Therefore, this methodology forces you to infer market potential with the little data available.

This is without considering that the internal complexity of the companies may cause noise in the data itself.

Consider when making market estimates, for example, that a company may sell its products through different channels, which complicates the analysis of its sales volume, prices, and costs.

Therefore, we will introduce you to another perspective of this method where you generate the data.

Bottom-Up market sizing from the supply side

The other bottom-up approach to estimating market size can be driven by supply-side logic. This one calculates your company's potential revenue by asking how much it can realistically produce and sell.

The underlying assumption is that the main constraint your company has is its installed capacity.

To create bottom-up revenue projections, you must first define what constitutes a unit of sales. Is your company selling a product, a service, or offering a bit of both?

For example, a unit could be a cell phone, a mobile broadband subscription, or a combination of the two. Next, you need to define not only how many units your company is able to produce, but how many units it can sell.

This, of course, requires an understanding of the logistics behind the supply chain, production process, marketing, and sales of the product itself (value chain).

To establish the level of demand and the average price, you can use primary and secondary market research techniques.

Primary research consists of directly surveying or interviewing market participants about your company's product, operations and business strategy.

Those you might approach include:

  • Customers
  • Suppliers
  • Industry experts

Interviewing customers, suppliers, competitors, or industry experts will give you insights into the business ecosystem.

You can ask customers about their needs/problems and their reactions to the solution your product/service provides. This can be done through focus groups, surveys, and other observation methods.

On the other hand, suppliers, competitors, and experts can provide more information about market conditions and production costs.

Meanwhile, secondary market research is supported by, among others, the following sources:

  • Reports and statistics
  • Specialized consulting firms
  • Search engines
  • Trade journals

Industry reports and statistics are often available free of charge. More detailed information, often found in industry intelligence, is sold by specialized consulting firms.

This information can be used for both imitation and benchmarking. However, benchmarking requires careful interpretation, as it becomes inappropriate when different business models are involved.

In contrast, benchmarking firms that use similar business models in different industries can generate useful information.

With an industry mapping, you can interpret the available data by comparing it to your own company's past performance, allowing you to rely on proven data.

However, this data only becomes reliable after your company has built up a track record and reached a certain level of operational stability. In addition, this method is backward-looking.

Therefore, it can be misleading in times of change (such as when the market or company strategy is changing).

It is essential then that you know your industry so that you are able to make assumptions about the market while estimating the size of the market with the data generated in your research.

Top-Down market sizing

An alternative approach is to perform a top-down analysis to estimate the market size. This involves less effort compared to the various existing techniques, as it is driven by a market demand logic.

It starts with an estimate of the size of the relevant target market and then assesses what fraction of this (i.e., market share) your company believes it can achieve.

The top-down approach asks what market share your company can potentially capture. In fragmented or differentiated markets, it is difficult for any company to achieve significant market share.

A top-down analysis works well when the target market is well defined and market shares can be reasonably close.

The advantage of this method is that the model starts with data that the market has accepted as a benchmark truth and you do not have to invest resources to generate the data.

Now, depending on what motivates your market research, you can use any of these methodologies to analyze the potential or growth trends of your target market.

How to estimate market growth?

The compound annual growth rate is a " softened " performance metric, which estimates the expected growth at the end of a specific period of time.

This formula does not specify the peaks and valleys of market performance. Instead, it provides an average of the different values over a long period of time.

In the context of market size, the growth rate is equivalent to the rate of increase or decrease between the current market revenue (market size at closing) and the market revenue at some point in the past (market size at inception).

Example of defining market potential: a case study  

Consider that you have already segmented your target market and what it will demand. You have also determined the average price customers might pay and where your competition is and the production capacity of the market.  

Next, you set out to calculate the portion of the market you reasonably expect to reach. This market potential is an estimate of the amount of money you expect to make from the product or service you plan to market.

Now, there are seven steps to estimating market potential (so far you have already completed the first four steps):  

  1. Define the target customer profile and buying behavior.
  2. Narrow down the market based on geography, demographics, and PESTLE analysis.
  3. Estimate the competition and the material limits of your production capacity.
  4. Determine price and price sensitivity to estimate the market size.
  5. Estimate your company's market share.
  6. Determine your customers' average annual consumption.
  7. Calculate the average selling price of the market.

After that, you should be able to answer these questions, which give you the information you need to estimate the market potential. Otherwise, your market research is not optimal and you should dig deeper:

  • What kind of customer will buy the product or service?
  • Where are these customers located?
  • How many potential customers are there?
  • How often do they consume or use it?
  • Who and what is the competition?
  • How much do people pay?
  • What is the market development potential?
  • What is my market share?

Once the market research is established, you can proceed to step 5. That is the estimation of market share or potential. Doing so will allow you to infer whether your addressable market will be sufficient to cover your company's operating costs and expenses.

Generally, the market potential is the highest estimated net income that your business would earn, which implies that you have already set a price and projected your production capacity. It will then be possible to see, considering the potential for sales growth, whether you will be profitable.

Suppose that to develop these bottom-up projections, you assumed that the price for retailers distributing your green mobile batteries would have to be MXN$580.

You based this price on your costs and on the fact that the energy efficiency and your designs are superior to the market standard.

This placed your first product, the Fusion Mobile battery, in the premium price category, but not at the top of the range.

On the other hand, you learned from retailers that market your battery that a foreign competitor plans to introduce a battery that recharges with body movement next year.

Consequently, you rushed the production of your new battery that can be recharged by solar energy, the Lithium-Green battery. This in order to place it at a price of MXN$780 in 2023 to satisfy the niche market that the new competitor plans to target.

You are aware that these prices do not represent the revenue you would get for each unit sold. For starters, you were forced to give up a 40% margin to retailers selling your Mobile Fusion battery.

In addition, you expect retailers to return approximately 5% of the product (due to defective products or dissatisfied customers).

The net revenue per unit sold would therefore be only MXN$330.60 = MXN$580 X 60% X 95%.

In the meantime, you decided to apply an aggressive sales strategy for the Lithium-Green battery, in order to win market share from your competitor. The strategy is to give up an additional 20% co-branding margin with a well-known local phone brand.

So the net revenue per unit sold would be MXN$296.40 = MXN$780 X 40% X 95%.

Based on the compound annual growth rate you estimated, you expect to sell 7,000 units of eco-friendly mobile batteries by 2023. If this sales growth trend is respected, the number of units demanded would increase to 35,000 by 2027.

In contrast, you would sell 10,000 Lithium-Green solar batteries in the first year (2024), but the new commercial trend would boost sales to 80,000 by 2027 according to your PESTLE analysis.

Bottom line, you projected that your Mobile Fusion battery would generate revenue of MXN$2.3 million in 2023, increasing to MXN$11.6 million in 2026.

You also estimated that your new Lithium-Green battery would generate revenue of MXN$3 million in 2024, increasing to MXN$23.7 million in 2026.

This would imply total revenues for your company of MXN$35.3 million by 2027.

Next, in order to estimate your market share, you had to make some assumptions about your market share in Mexico and South America.

While you believe that your company produces superior products to the competition, you know that gaining market share takes time.

According to your Mexico sales report, you will gain an initial market share of 5% by 2023. This is assuming you keep running a single product.

You would have a 10% share by 2024 if you can get your Lithium-Green solar battery in place before your competition floods the market with their motion rechargeable batteries.  

After that, you would expect your market share to grow 5% per year in relative terms (i.e., 5% of 10%, or 0.5% in absolute terms). However, the growth potential in South America will be lower, given the fragmented nature of the market.

Therefore, you assume an initial market share of 5% in 2024, which will grow by 15% in relative terms until 2027.

Based on these assumptions, you estimate that revenues in Mexico will grow from MXN$2.6 million in 2023 to MXN$21.5 million in 2027. In South America, we expect revenues to grow from MXN$2.3 million in 2024 to MXN$8.5 million in 2027.

The Top-Down projections assumed essentially a faster adoption of both products in both markets, while the Bottom-Up projections expected a more gradual adoption process given your value chain.

Now, using this data, you set out to infer the potential market for 2023. You do this by looking at the number of potential buyers, an average selling price, and an estimate of demand over a specific time period.

The overall formula for this estimate is simple:

MP = N × CM × P × Q


  • PM = potential market
  • N = total number of potential consumers
  • MS = market share
  • P = average sale price
  • Q = average annual consumption

Having calculated the estimated market potential of MXN$151,568,286, it is possible to assess whether the market is large enough to support your business and any additional competitors in the market.

Therefore, with your maximum sales estimate of MXN$10,727,500, you should not be concerned about the addition of your foreign competitor to the shelves of retailers with whom you have commercial contracts.

Likewise, you should not have to make decisions based solely on your market share, as we will see below.

Ratio of market share and return on investment (ROI)

As market share increases, ROI goes up only a little, but the profit margin on sales increases considerably (gross margin).

The main reason is expense behavior, since as your market share increases, so do selling and operating expenses, which reduces profit.

In some cases, expenses even absorb the effect of economies of scale, such as the decrease in manufacturing, marketing, and distribution costs when suppliers sell in large quantities.

This is due to the fact that ROI depends, of course, on both the net profit rate on sales and the amount of investment required to support a given sales volume.

On the surface, then, higher asset turnover does not appear to be a major factor contributing to higher rates of return.

However, this remark is subject to some caveats, such as companies in the digital ecosystem whose services are tangentially related to their working capital requirements. For instance:

  • Software as a Service (SaaS).
  • Subscription-based digital services.
  • Digital distribution platforms.

Then, your asset turnover is likely to increase somewhat more with market share.

This is because companies with a high market share are, on average, somewhat more vertically integrated than those with smaller shares. But their utility will not do so to the same extent.

In conclusion, we can infer that the relationship between market share and ROI reflects a common underlying factor: the quality of management.

Good managers succeed in achieving high shares in their respective markets while simultaneously controlling costs. Thus, they encourage market share to be aligned with profitability.

In this scenario, it does make sense to set market share targets. You could weigh the increase in market share against the rate of return by analyzing its impact on budgets, as well as a company's capital requirements and cash flow.