What are the best ways to determine potential market size?

I wanted to share with you a simple and effective way to calculate the market size for your product or service. I used it for my company. This is a crucial step when starting a new business venture, as it helps you understand the potential customer base and determine if your idea is worth pursuing. So, let's dive in!

Step 1: Identify Your Total Addressable Market (TAM)

Determine the number of potential customers out there and estimate how much each customer could bring in annually for your product or service.

This will give you an idea of the overall market size.

To calculate it, use the following formula:‍

All of the customers in the market x Annual Customer Value = TAM

Step 2: Define Your Serviceable Addressable Market (SAM)

Zoom in on the specifics. Consider your company's capabilities, such as geographical location, ideal customer persona, and available resources. Calculate the portion of the TAM that aligns with your company's strengths and determine the value of each customer in this narrowed-down market.

This step will give you a realistic view of the market size your business can target.

Use this formula:

‍ Target Segment of TAM x Annual Customer Value = SAM

Step 3: Calculate Your Serviceable Obtainable Market (SOM)

Consider your company's current scale and performance. Take into account factors like marketing actions, sales strategies, conversion rates, and product demand. Use historical data, such as last year's revenue, to determine your market share. Then, project that share onto next year's SAM to estimate the potential revenue.

Then the formula will look like this:

Last year's SAM ÷ Last year's revenue x This year's SAM = SOM

Step 4: Determine Your Penetration Rate

Assess how much of the market you aim to capture. This step helps you set realistic goals and understand the potential growth of your business.

By following these four steps, you can get a solid estimation of your market size. Remember to regularly revisit these calculations to stay adaptable and responsive to market changes. Good luck with your business venture!

I've collected all these formulas in the guide on how to calculate market size. I also clarify the process and explain how to determine market size. Additionally, I've included an example of market size calculation to further simplify the task for you.