So you have made it this far in your preparation for your big pitch. You are now facing the part where you need to determine your market size. The section that determines if your business is profitable.
Congratulations. But not so fast.
Often, many people blast through this section as an introduction. Many fill in random figures they found off the internet or exaggerate it to please investors.
But as humble as it looks, your market size could be the most critical part of your business. Why is this section so important? Investors love this part because it helps them have a clearer view of what success looks like.
So how do you ensure your investors know that you have your market size dialed in and convince them to invest in your business.
How to Determine Your Market Size
When it comes to determining your market size, what you are looking at are two metrics data on your potential customers that you can use to calculate your share of the market or number of transactions each year.
Here is an example: If your product is shower gel, ideally, everyone is bundled up in that final figure you'll have. But if your product is luxury cars, it might be wiser to consider the total number of luxury car buyers in your target demographic. It wouldn't be wise to open a Lamborghini shop in an area where the average household income is $4500 per year now, would it?
Now that we have that out of the way let's discover how we can determine our market size for that big pitch.
One more thing before we get into the process.
RULE: Delete all That Third-Party Data
I will not sugar coat it; copying another entrepreneur's market figures is like trying to fit a square shape down a triangular opening. They just won't fit, no matter how closely similar your businesses are.
These numbers are always too big or generally incorrect. Moreso, investors aren't looking for final figures when looking at this section. They are interested in how you arrived at your figures.
So do yourself a favor and get rid of that data you got off the internet.
Great, now we can get into how you can determine your market size without that dangerous data from the internet. Let's get into the process
1. Define Your Target Market
Statements like everyone in London won't mean anything. Not even the most prominent brands have 100% of any given market. Brands like Coca-cola also still lose customers to other soft drink brands.
You have to zero down on the ideal customer you are planning to target and make sure you know them well enough to establish your brand as a more practical purchase choice in a buying decision.
The definition you give (assuming you have been as detailed as possible) is what we shall use in the next step.
Further Reading: How to Effectively Define Your Target Market
2. Carry-out a Top-Down Sizing for your Target Market
An excellent place to start this exercise is to carry out a top-down analysis.
Simply put, this metric takes the total market size and from here is where you estimate your market share. This calculation is often done first because it is easier and provides a great deal of important information.
[Your Market Opportunity] = [Total Market SIze] * [Your Market Share]
For example, If you are an airline company in the US and the industry made $20.24 billion in 2019, and you know that your competitors made $14.5 billion, it would be fair to assume $5.74 billion was yours.
Further Reading: Different Market Sizing Approaches Explained
3. Verify It With the Bottom-up Approach
The top-down approach's main flaw is you have to rely on data published by someone else (See the rule above). This is exactly what we are trying to avoid. So a bottom-up approach is better and more detailed.
To determine your market size with the bottom-up approach, you'll have to determine where you'll sell your products, how many locations will stock them, and how many comparable products typically sell in that area.
At its core, a bottoms-up analysis determines the individual spend-ability of your target customer or a group, determines how many potential customers exist, and multiplies the two for a market sizing.
Try to be as objective as possible. This calculation could help you figure out where realistic growth could take you. Then compare your numbers to the overall addressable market. If it's between the 1 to 5 % mark, your numbers are probably realistic.
Analyze Your Competition
Don't do it to get a copy of their market data (No matter how lucrative that may look).
Instead, answer questions like; How crowded is your industry? What companies are dominating the market? For example, if you are a steel producer for a specific product, it makes sense to get into the top 10% of the market share. On the other hand, if you were in the airline industry, it would be unrealistic to try to even get into the top 50% in your first years.
Further Reading: How to Accurately Analyze your Competition
Access Your Static Market Share
In a static market, competition is fierce. Everyone is competing for the same pool of customers each year.
Take an example of the hospitality industry. A new hotel company must determine if the budget segment is growing faster than the luxury segment. This will inform them how the long-term total addressable market size will likely change, which can help you respond to trends.
Knowing your market size is a basic foundational part of getting through to any investor in your pitch. Every entrepreneur needs to know how to calculate it and its relation to potential revenue in their addressable market.
Be honest, yes, investors love big numbers, but they can smell inflated numbers from a mile away. Just make sure you can back up your claims with data and research, you derived your numbers from, and how you arrived at your assumptions.