A simple strategy for market sizing used by startups
By: Amit Vikram Tripathi
Tags: Startup, Education, Marketing

For an entrepreneur, market sizing becomes an important task. Let’s suppose you have a fantastic idea on which you started working, but in midway, you realize that the market size is more limited. You will lose both your time and money. Although market sizing is not a common practice among innovators but being an entrepreneur, you must be aware of what you are chasing? Market Sizing will help you in preparing your pitch deck and raise funds for your startup.

Photo by Thought Catalog on Unsplash

You may find thousands of articles on the same topic, but only a few of them contain practical information. Here we are presenting a case study through which you will be able to learn the steps of market sizing. So get a pen and paper and let’s start!

TAM (Total Addressable Market)

The Total Addressable Market (TAM), or the total available market, is the overall revenue opportunity that is available to a product or service if every possible customer was the customer of your company.

As we have discussed earlier for every startup, it is necessary to include at least one slide of TAM in their pitch deck. TAM gives a clear idea about the market size and potential to the investors. That is why at the time of raising funds, almost investor inquires about TAM.

Most importantly, TAM represents the revenue of only one year. For example, if your company sells insurance for mobile phones in India for INR 1000 per year per phone, the Total Addressable Market will be around 500 Billion INR. It means if all the available customer purchases mobile insurance from your company, you will be making 500 Billion INR revenue.

There are three methods used to calculate the total addressable market. They include:

Top-Down

The top-down method use industry research and reports for calculation of TAM. This approach follows a narrow down strategy which eliminates the total number of customers at each step and then reaches on a small group of focused audience who are willing to opt your service or purchase your product.

Considering the previous example of selling insurance for the phone, we assumed the total number of customers equal to 500 million but, when we opt for the top-down approach to reach our potential customers, we need to eliminate the rest of them. As we all know, all 500 million people will not be interested in buying our insurance. Let suppose a hypothetical study says 50% customer doesn’t purchase the insurance and 25% pay on average 500 INR only. Thus we are left with only 25 % of 500 million customers, which is 125 million people who are our targeted audience. Now the TAM shrinks to only 125 Billion INR.

Bottom-Up

While Top-Down market sizing is usually easy to do, it can be misleading. Can you reach that entire market? How much would it cost you even if you could? The good news is that Bottom-Up market sizing gives us a clear picture of those factors.

The bottom-up approach is the most reliable. It uses data from early selling efforts. It uses a reasonable estimate of the number of businesses in its target market to obtain the TAM.

Again we use our previous idea of selling insurance for the phone, but this time we are using the bottom-up approach for calculating TAM. In a small city of 5000 families with at least one phone in each family which means 5000 phones in a city. As our hypothetical report says, people buy insurance for phones worth 15k INR and above. Only 67% of phones are worth 15k INR and above. Thus, in a small city, 3350 phone users are our potential clients. Keeping all factors identical, if we reach 1000 small towns in India, we build a customer base of 3.35 Million users and selling them our insurance of 1000 INR. We estimate TAM as 3.35 Billion INR.

Value Theory

It is a different strategy from the above two. Here we measure the user’s willingness to pay for your offered service or product. It depends on how much value a customer sees in your product or service. This theory evaluates the value created by the company. It is used to calculate TAM when a company is introducing new products into the market or cross-selling certain products to the existing customers.

I leave this exercise on you, calculate the TAM of mobile insurance startup using the Value Theory method.