Whether you are exploring a new business idea or opportunity, or developing an existing one, being clear about the size of your market is key. If the market is too small or competitive there might not be enough customers to make your business viable.
Calculating market size can be particularly important if you are looking to create a pitchdeck and attract the interest of investors, but it should also be at the forefront of your own thinking and planning as you plan and grow your business, as market trends and sizes are not static and are changing all the time as consumer needs and expectations change.
Market size is the number of potential customers you could sell your products and services to, and there are two main types of calculation you need to think about:
- Total addressable market (TAM). The total number of customers or total £ income you could earn if you sold to every customer in your market without competition.
- Total available market or ‘Segmented Addressable Market (SAM). The total number of customers you could realistically reach or total £ income you could realistically earn within the total addressable market.
Follow these steps to calculate your total available market:
- Begin with a customer persona to be clear on the profile and characteristics of your target customer.
- Conduct secondary or desk research to search for existing information about the size of market. Market industry reports can help. Information and data from Companies House, the Charities Commission, or relevant sector umbrella membership organisations can help identify the total number of businesses or organisations in a sector. While sources such as the Office for National Statistics, NOMIS, and the Consumer Data Research Centre, and market trend reports can help you to identify the total number of people, households or individuals that meet your criteria.
- Perform top down analysis by starting with the numbers that represent the total market and then working down to look at the size of specific sub-sectors within that market or sector.
- Execute bottom up analysis to start to identify your total available market. Here you are calculating the number of potential customers you can realistically reach, based on factors such as the price of your product or service, the type of return you can expect from your marketing activities, and the level of competition. You will typically need to carry out primary research with a sample of the total addressable market, to draw conclusions about how many customers you can realistically reach. Customer interviews and surveys, and focus groups can help here. You could also use industry benchmarks for making assumptions about the numbers of customers you could reach through your marketing activities.