1. What Is Market Size?
Market size represents the total revenue or number of customers a business can capture in a given market. Calculating it helps entrepreneurs and investors understand the growth potential of a product or service.
2. Why Calculating Market Size Matters
Knowing how to calculate potential market size is crucial because it:
- Shows whether your idea is financially viable
- Helps attract investors with realistic projections
- Guides product development and pricing
- Shapes marketing and sales strategies
3. Key Concepts in Market Size Calculation
- Total Addressable Market (TAM): The total demand for your product/service if you captured 100% of the market.
- Serviceable Available Market (SAM): The portion of TAM you can realistically target.
- Serviceable Obtainable Market (SOM): The share of SAM you expect to capture in the short term.
4. Step-by-Step: How to Calculate Potential Market Size
Step 1: Define Your Target Market
Be specific—include location, demographics, and customer type.
Example: UK coffee drinkers aged 18–40 in urban areas.
Step 2: Estimate the Number of Potential Customers
Use data sources like government statistics, trade associations, or industry reports.
Example: 15 million people in the UK drink coffee daily.
Step 3: Estimate Average Spending
Calculate how much your target customer spends annually on similar products.
Example: Average coffee spend = £600 per year.
Step 4: Calculate TAM (Total Addressable Market)
Formula: Number of customers × Annual spend
Example: 15 million × £600 = £9 billion TAM.
Step 5: Narrow Down to SAM (Serviceable Available Market)
Filter by the segment you can realistically reach based on geography or niche.
Example: Targeting only London customers = £2 billion SAM.
Step 6: Define SOM (Serviceable Obtainable Market)
Estimate your market share based on competition and capacity.
Example: Capturing 1% of SAM = £20 million SOM.
5. Methods of Calculating Market Size
- Top-Down Approach: Start with overall industry size and narrow down.
- Bottom-Up Approach: Start with your own pricing and sales model, then scale up.
- Value Theory Approach: Estimate based on the value customers assign to your solution.
6. Mistakes to Avoid
- Overestimating potential by using vague numbers
- Ignoring competitors and realistic market share
- Confusing TAM with SOM
- Using outdated or unreliable data sources
7. Tools and Resources for Market Size Calculation
- Government databases (ONS, Eurostat, Census)
- Industry research reports (IBISWorld, Statista)
- Market surveys and customer interviews
- Google Trends and keyword research tools
Frequently Asked Questions
1. What’s the easiest way to calculate market size?
Use the formula: Number of target customers × Annual spend = TAM.
2. What is a good market size for a startup?
There’s no fixed rule, but investors usually prefer markets worth at least £500 million TAM.
3. Do I need professional research to estimate market size?
Not always. Many free government and industry resources are available.
4. What’s the difference between TAM, SAM, and SOM?
TAM = entire market, SAM = segment you can target, SOM = realistic market share you can capture.
5. How often should I update my market size calculation?
At least annually or when entering new markets.
6. Can market size predict revenue?
Not directly, but it provides a realistic ceiling for potential sales.
Conclusion
Knowing how to calculate potential market size is essential for making smart business decisions. By defining your target market, estimating customer numbers, and using TAM, SAM, and SOM, you can build realistic projections that guide growth and attract investors.