Tech Capital Partners Blog

Rick Segal published a post last week titled The Great Myth of Market Size. The topic of market size has been on my to do list for a while so I thought it would be a good time to share my experiences. First, I’ll start with some words of wisdom from Rick:

Your market size is a reflection of the people who are likely to actually buy/use your product/service and not the entire installed base of whatever

That’s pretty much it. We want to know what the Total Addressable Market (TAM) is and as indicated in the quote above, this should only include people that one would reasonably expect to be interested in your product/service.

Sounds pretty straightforward but more often than not, market sizing is a muted effort. The problems I see over and over tend to be of two varieties: (1) failing to segment the market and (2) using peripheral numbers.

Segmentation
Depending on the market, segmentation isn’t always an easy task. To start, you should define who the target customer is and from there you can make some reasonable assumptions (make sure you state them) or find some relevant stats to come up with a TAM. I can’t count how many times I’ve seen a slide that details the target customer in a very narrow fashion and then later on the Market Size slide has a number approaching the GDP of Canada. It just doesn’t add up.

Example: An entrepreneur has shown some great stats on the overall market but doesn’t do the math to determine the TAM for the product/service. Instead, the entrepreneur opts to take path of “everybody in this age group needs this service” – usually any primary research would show this statement to be untrue – So the overall market size sounds great at the outset but once you start to crunch the numbers the size dwindles rather quickly.

I’ve seen many presentations where all the ingredients for determining a reasonable market size are present but the entrepreneur refuses to do the math and instead focuses on the biggest number.

Peripheral Numbers
This is when the market size number presented actually has little or no relation to the Total Addressable Market (TAM).

Example: There are 100m people in North America that spend $8000/yr on widgets which means there is an $800B widget market.

It sounds great until you realize the company doesn’t sell widgets, they provide a service to help people find widgets and the business model is not based on referrals with a revenue share but a subscription model. A dollar increase in the widget market does not correlate to an increase in potential revenue for the business. Sure, the widget market size is related to their business but think about it this way, if you were to capture 100% of the market would that be $800B in revenue? The obvious answer is no since you aren’t selling widgets. So if that is the case then why use that number for market sizing purposes when you will never actually capture any of that potential revenue. Instead, the entrepreneur should use the stats that are known about the target customer (i.e. 30% of people are interested in using widget finding services and are willing to pay anywhere from $10 to $30 a month for this service). So 100m people * 30% * $10 = $300m is a good place to start for the TAM on the low side and $900m on the high side.

But people like big numbers
Sure, big numbers turn heads but at some point the numbers are going to have to hold. Having a realistic and well thought out market size speaks volumes about the knowledge and understanding you have about your customers and the market.

There is one final thing that should be mentioned and that is the use of the word ‘Conservative’. However harsh it sounds, in most cases when you use the word conservative while talking about the size of your market, your numbers almost instantly become suspect, especially when the number is extremely large to begin with. Almost everybody at some point in their presentation says their numbers are conservative. I’m not saying you can’t use the word, because in some cases the numbers are actually conservative estimates. What you need to realize is that it is a relative term and if you’re going to use it then back it up with a clear and concise explanation.

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