Besides developing an exceptional product or hiring the right talent, doing some much-needed market research is the most critical step for any startup. A part of this research should involve market size. Without knowing your market size, you may be conducting business in a market so small, it’s next to impossible to make any money.
Understanding market size helps you distinguish between two categories: the addressable market, which is the total revenue opportunity for your product or service; and the available market, which is the portion of the addressable market for which you can realistically compete. By outlining the difference between these two, you can develop a product offering to tackle that consumer sweet spot.
Without a solid grasp on your market size, you endanger your business’ success in not only the early stages, but also throughout its entire life cycle.
Seeing the business horizon.
Market sizing gives you a sense of market trends. It can clue you in on the necessary drivers of demand, as market movements often continue in one direction or another for a period of time. What’s more, those trends often indicate whether a substitute for your product is on the horizon that could potentially affect market size.
Take Kodak, for example. Prior to the late ‘90s, almost every picture in the U.S. was developed on Kodak film. Its name was synonymous with photography. But then digital broke big, and the number of digital cameras went from 4.5 million units in 2000 to 28.3 million units in 2007.
Instead of doubling down on digital photography, Kodak steadied its course, neglecting to look at what digital meant to both the addressable and available markets. As the addressable market dwindled, so did the available market, and the company’s complacency led to the downfall of its brand.
Once you understand its importance, how exactly should you go about determining your market size?
Step n°1 |
Define your subsegment of the market
Not even the largest, most established company has a 100 percent share of the market. In the case of Airbnb, its first big grab came from the shortage of hotel rooms during the 2007 Democratic National Convention. Zero in on your initial pool of customers, and make sure you have a handle on this group before you expand.
Step n°2 |
Conduct top-down market sizing
Look at the total market for your product or service, and then establish a realistic estimate for your market share. Take, for example, the hospitality industry. U.S. travelers spent $23 billion on vacation rentals in 2012 -- if Marriott International accounted for $13.8 billion of that spend, it would probably be a stretch to count the remaining $9.2 billion as yours for the taking.
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by Tx Zhuo Managing Partner at Karlin VenturesFollow