There’s no need to be a genius at math to know that your business is worth something. But if you don’t have the time or resources to do market research, there are still two easy steps you can take in order to ballpark your business size and potential traffic. The first step is to determine your target market. This will help you determine how big of an audience you should aim for and whether or not developing a website or social media presence is necessary. The second step is to find the right way to measure your success. In order to determine whether or not starting a business is the right decision for you, it’s important to have an understanding of both the financial and legal aspects of starting a business. By following these two simple steps, you can get started on building your next great business venture.

Market Size For Startups

The size of the market must be established. It informs you, your business partners, your team, and your investors of the true size of the market. It makes it easier to determine the true value of your particular venture. Even if you have no intention of ever raising any outside funding, you must be aware of this.

If you ever need to raise money for your business, the size of the market becomes much more crucial. It is one of the most fundamental digits that any potential angel or venture capital investor will anticipate. During seed and pre-seed financing rounds, even your friends and family should inquire about it. Your credibility will be instantly destroyed if you arrive empty-handed.

Unfortunately, this is a point that business owners frequently overlook when creating their initial plans, starting a new venture, or pitching investors. How then do you do it correctly?

How To Calculate Market Size

How to Calculate Your Market Size in Two Easy Steps
  1. Determine your target market within the total addressable market (TAM), which varies depending on geography and other logistical considerations.
  2. Determine the penetration potential of your target market using it as a starting point.
  3. To determine your market size, multiply your target market by your penetration rate.

Market Size Example

Let’s go through an example to see how you might estimate the size of the market.

An emerging wine business

Imagine you wanted to launch your own wine business. Here’s how to determine the size of the market: First, you should figure out how many liquor stores there are in the United States; this will help you estimate the size of the potential market for your product.

You find out from your research that there are 50,000 liquor stores in the US. You only want to sell to customers in New England, which includes Massachusetts, Maine, and Rhode Island, out of that entire list.

You determine that the 1,000 liquor stores in the New England region are part of your target market. From here, you conduct research and consult with alcohol distributors to ascertain that wine distribution has a roughly 40% success rate.

Using this as an example, the formula for calculating market size would be:

1,000 liquor stores multiplied by 40% equals 400 stores.

Then, using the following formula, you can calculate potential revenue if you assume each liquor store will generate $20,000:

$20,000. 400 liquor stores equals $8,000,000.

This means that if you can capture 40% of the market in the New England region, you could earn $8 million. However, this doesn’t account for the wine sold by your rivals or for all the other alcoholic beverages that are available in any liquor store. Because of this, you should be cautious when estimating how much of the market you’ll win.

How To Use Estimated Market Size

How to Calculate Your Market Size in Two Easy Steps

Now that you know the size of the market, what should you do?

The following questions are answered by market size for your company:

  • How much money could we potentially make from this market? In other words, is it even worthwhile investing our time and effort?
  • Can we find enough interest in the market?
  • The market is it expanding? In three, five, or ten years, will there still be opportunities to profit from this market?

Knowing your market size is important when you’re looking for funding. Investors will need to know how much you could potentially earn from a particular market. It’s also critical to assess whether the costs of running your business outweigh the potential revenue you could generate.

Once you know the size of the market, you should also take into account how crowded the market is with your competitors’ goods. In the end, you won’t be able to reach the entire addressable market (TAM) because some of those customers will choose the products of your rivals. Therefore, you must assess your chances of attracting enough TAM customers to make this business venture profitable.

How To Determine Market Value

The size of the market, the number of potential customers, or unit sales are just some examples. What that is worth is an entirely different, and possibly more significant, number.

You must be aware of the potential revenue on that market. One of the real estate tech startups with the fastest growth is UpNest, which enables homebuyers and sellers to avoid paying realtor commissions. If there are 5 million home sales annually, the average realtor commission is 5% of the sales price, 90% of users use a realtor, and the average home price is $394,300, UpNest competes in a $88.7 billion market. The market size for Or is $88.7B.

Total Addressable Market Calculation (TAM)

How to Calculate Your Market Size in Two Easy Steps

Practically speaking, no startup should or can anticipate obtaining a 100% market share. For the vast majority of business owners, trying to dominate an entire market without first focusing on several niches, price points, customer sizes, or geographic areas for rollout will be financial suicide.

For instance, the market leader in online real estate, Zillow, has much more conservative expectations for its own new business, which involves buying and selling homes directly to customers. The CEO of the company recently stated that it would be doing very well if it could purchase 275,000 units at a $3,500 profit each. At slightly more than 18% of the available market share, that amounts to about $1 B annually from just one additional revenue stream.

Of course, the majority of new businesses can’t even hope to control that much market share. Even if you could, the majority of experienced investors won’t believe you until you can back it up. If it’s 1 to 5 percent of the pie, you have a realistic plan, according to Tx Zhuo of Karlin Ventures.

One trick, according to Projection Hub, is to make anonymous calls to all of your local competitors and ask them how much volume they are doing if you have no idea what constitutes a reasonable amount of market share in your industry. Then project that as you gain momentum, you’ll be doing a small portion of that.

Consider the static versus evolving nature of the market as well. Will there be more potential customers in your market in five years or less, based on current population growth rates? Don’t forget to take into account how you will affect the market.

For instance, if you were Amazon ten years ago, you should have anticipated that you would soon be destroying the market for traditional book stores. Their price reduction significantly reduced the market’s value as well.

Jared Sleeper, an early-stage venture capitalist at Matrix Partners, points out that there are actually “three different ways to calculate TAM.”

As follows:

  • using reports and industry research from the top down.
  • using data from early selling efforts from the bottom up
  • Value theory based on the assumption that customers will be willing to pay.

Before you enter an investor meeting or complete polishing your pitch deck, it is best to be familiar with all of them.

Conclusion

The stock market is a great place to sell products. By calculating your company’s market capitalization and price changes, you can determine the size of your industry and how much you would need to pay to sell each share. However, it’s important to keep in mind that price changes can have an impact on a company’s market capitalization. Consequently, it is important to make sure that you are prepared for any potential price changes before selling your product.

Read previous post on How Do You Calculate Market Share? for further information

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