Starting a business is exciting but one of the first questions every founder faces is: How big is my market? That’s where the process of market sizing lies. Market sizing is the process or estimation of the potential demand your product or service may come across. It is not just about big figures but realistic opportunities.
So, for founders, making sense of market size and its implications can help formulate a business strategy, even pitch to investors, and sometimes decide whether an idea is worth pursuing.
The market-sizing guide is designed to enable you to master the art of sizing a market.
This book will take you through important concepts, practical methods, and specific challenges when applying this in the Indian market. Whether you’re launching a startup, scaling your business, or preparing for investor pitches, the market-sizing guide will enable you with the tools and confidence you need to get the market size right.
Are you ready? Let’s go!
Chapter 1
Understanding Market Sizing
1.1 Key Concepts
Before we start with how-to, it’s about time to touch the ABCs. Market sizing operates on three fundamental terms:
TAM (Total Addressable Market): This is the high-level view. TAM defines the total revenue opportunity available in case your product or service could capture 100 percent of the market. As an example, if your business is in the business of online grocery delivery, then TAM would include grocery purchases made in your target geography.
SAM (Serviceable Addressable Market): Okay, let’s narrow down a bit. It is a part of TAM that you can realistically service, again based on the capabilities of your product, geography, and customer segment. Suppose you are serving only metros. Your SAM will leave out rural and tier 2 areas.
SOM (Serviceable Obtainable Market): This is the smallest and most actionable segment. SOM represents the share of the SAM you can realistically capture within a specific timeframe, given your resources and competition.
Knowing TAM, SAM, and SOM will help you have a clear picture of the market potential and set realistic goals.
1.2 The Significance of Market Sizing
Why is market sizing important? Here are three reasons why it matters:
Business Planning: It will help you align your goals and strategies with market realities. The clearer the idea of market size, the better your decisions on product development, pricing, and marketing.
Investor Confidence: Investors like to know that your idea has a huge growth potential. A good market-sizing analysis shows that you are aware of the market as well as the potential your business can have.
Decision Making: Whether you are launching a new product, venturing into a new market, or competing with established players, the market-sizing analysis helps you to prioritize your resources to avoid costly mistakes.
Market sizing is not just a one-time exercise—it’s a tool to revisit as your business grows and markets evolve.
Chapter 2
Approaches to Market Sizing
2.1 Overview of Methods
Three approaches are most commonly utilized in market sizing: top-down, bottom-up, and hybrid. Let’s break them down:
Top-Down Approach: It starts with the widest level of market figures like the total revenue of a specific industry, and then, filtering through that to your business based on assumptions and filters. Like for instance, if the Indian food delivery market is ₹1,000 crore, one could approximate his share as he filters down based on his regions, target, and type of service delivered.
Pros: Simple to determine and quick in calculations.
Cons: Involves majorly the use of assumptions. More on the rough end of estimation.
Bottom-Up Approach: This approach works backwards, starting with information related to the number of leads or units sold. An example of this could be the opening of a juice bar. You would estimate customers a day, average spend by the customer, and the locations you intend to open.
Pros: This approach is more precise and realistic because it takes actual data.
Cons: The approach is time-consuming, as it relies heavily on details.
Hybrid Approach: The name says it all, this combines elements of both top-down and bottom-up methods. You might begin with a broad market figure and validate it using specific data from your business or competitors.
When to Use: When you have access to both broad market data and specific insights about your niche.
2.2 Selecting the Best Approach
How do you determine which approach to use? Consider the following:
Availability of Data: If you have access to granular data, then bottom-up is likely the best choice. Otherwise, start with top-down and refine as more information becomes available.
Market Characteristics: For mature markets with documented data, a top-down approach may be best. For emerging or niche markets, a bottom-up approach is likely more reliable.
Business Goals: Are you to craft an investor pitch or clarify an internal strategy? Consider a methodology that matches what you need in terms of precision.
The aim should be a balance between adequacy and effort. Too many people waste too much effort on making things perfect where a good, reasoned approximation is often good enough.
Chapter 3
Sizing the Market
3.1 Step 1: Define Your Market
Get really clear on what your market is. Ask yourself what problem does my product or service solve? Who are my customers? Where are they? This step will prevent assumptions and make sure that the sizing effort you are focusing on is accurate.
For example, if you are creating an online tutoring platform, then students who are in India preparing for competitive exams form your market. That is the target segment. The more specific, the more precise your estimates will be.
3.2 Step 2: Data Collection
After knowing your market, it’s time to collect data. You will get the best-rounded view if you use a mix of the following sources:
Free Sources: Government reports such as Census data or reports by organizations like NITI Aayog.
Paid Sources: Platforms such as Statista or any industry-specific databases.
Primary Research: Surveys, focus groups, and interviews with potential customers.
The key lies in combining data from many sources. For example, government data might give you broad trends; however, customer interviews would reveal insights specific to your niche.
3.3 Step 3: Estimate Market Demand
Determine how many people demand your product or service. This includes doing the following:
Qualitative Analysis: Identifying consumers’ preferences, pain points and willingness to pay.
Quantitative Analysis: Using actual numbers to forecast demand. For example, if it is working professionals in cities, then find out what the potential number and average expenditure for them.
3.4 Step 4: Estimate the Market Size
Use this data to estimate your market size. For bottom up, multiply the number of potential customers by the average revenue per customer. And for top down, starting with industry data, add filters like geography or income levels.
If you’re selling fitness equipment and targeting gyms in metro cities, identify the number of gyms, their average equipment budget, and your expected share of that market. Add these figures to arrive at a solid estimate.
Chapter 4
Specific Factors of Indian Markets
4.1 Urban Versus Rural Markets
The dynamics of the market greatly vary between urban and rural markets in India. With higher purchasing power, better infrastructures, and easy access to data, the urban market is always in a different league. In contrast, the issues of rural markets are minimal internet access and lower income disposable. But they equally hold great potential.
For example, a mobile beauty salon business could find higher demand in the urban areas, but a smaller number of competitors in rural areas. So, a differentiated approach to market sizing would be very important.
4.2 Problems in Data Reliability
Indian markets are heterogeneous and ever-evolving, making it a bit tough to get accurate data. The most common issues that occur are reports out of date, non-uniform metrics, and region-wise variations. This can be addressed by:
Checking the data from different sources.
Using proxies if the data is not available. Mobile phone penetration may serve as a proxy for Internet access. Updating the estimates with new data when they come in.
Staying flexible can help you work through these issues and develop a more accurate market estimate.
Chapter 5
Tools and Resources for Market Sizing
5.1 Necessary Tools
Market sizing does not have to be intimidating, thanks to the proper tools and resources. Consider the following necessary options:
Survey Tools: With platforms like SurveyMonkey or Google Forms, you can collect first-hand data directly from your target audience.
Analytics Tools: Google Analytics and similar platforms can help you understand the trends in online traffic and customer behaviour.
Financial Modeling Tools: Spreadsheets like Microsoft Excel or Google Sheets are excellent for bottom-up estimates and scenario analysis.
TAM Calculator
This calculator enables you to estimate your market’s overall revenue opportunity. You do this based on your target population, average unit price, and the purchase frequency.
SAM Calculator
This calculator estimates your potential revenue by incorporating your target population, price, purchase frequency, and conversion rate. Knowing SAM helps you prioritize resources and strategies to focus on achievable growth opportunities.
Conclusion
Market sizing requires analytical thinking, good data, and deep knowledge of your market.
For business owners and aspiring entrepreneurs in India, this would mean unique dynamics of urban-rural scenarios, a very diversified consumer base, and industries that evolve at breakneck speeds.
Market sizing is not a process of trying to get the number right but is more of creating a good foundation for business decisions.
So take the first step.
Start defining your market today, and unlock the potential for your business to thrive!