A lot of investors might have asked you this question by now. Most of your entrepreneur friends might be quoting how their start-ups are addressing a billion dollar market and you might be wondering, “Hey I carried out a Google search but no where I could find a press release about the market size for my company. What magical number should I quote?” If the press isn’t quoting your number, here is a thumb rule for estimating your start-up’s market size:
Market Size = Total number of Possible Buyers x Average Selling Price (or ASP) x Frequency of Purchase in one year
For example, let’s calculate market size for a toy shop selling toys worth Rs 500 on average for kids between 9-12 years for a locality having 1,000 kids in that age group. Given the assumption that kids buy two toys in a year, its market size = 1,000 (number of possible buyers) x Rs 500 (ASP) x 2 (frequency of annual purchase) = Rs 10 lakh.
The number of possible buyers can vary depending on the geographies you serve. Also, remember that the frequency of purchase can vary depending on product to product. Some products can be of utility on a daily basis while some can have as low purchase frequency as once in three years.
The last but most important aspect of market sizing exercise is the price of the product. Do a competition analysis and determine what your price has to be. (More on pricing strategy in coming weeks). Good then? But you may ask, why to carry this market size exercise? This will help you understand your growth potential. This will also affect a lot of strategic decisions: deciding which technology to invest, how to build a distribution network, which geographies to approach first, how to market to reach the target customer and so on.
Most VCs and angel investors will need to know whether they are investing in a big enough market or not. You might get turned down if your market size doesn’t make sense for the kind of investment you are looking for. Even if you are not an entrepreneur and reading this, remember that this market size exercise will be useful for you, especially if you are getting interviewed for business-related roles.