When most companies forecast their revenue goals, they first calculate their total addressable market, the total market demand for their industry’s products or services. Simply put, it is the maximum amount of revenue a company could generate if they captured their entire market.
However, unless you are a monopoly, you most likely will not be able to capture the total addressable market for your products or services. Even if you only have one competitor, it is still extremely difficult to convince an entire market to buy just your products or services.
That’s why it’s critical to calculate the maximum amount of revenue you could potentially generate by selling your products or services to the customers who would realistically benefit from buying your solutions.
This amount of potential revenue is called your market size or usable addressable market and you can use it to accurately measure the growth potential of your business.
Your market size, or Serviceable Addressable Market (SAM), is the maximum amount of revenue you can potentially generate by selling your products or services to the potential customers who would realistically benefit from purchasing your solutions. This metric helps you accurately measure your company’s growth potential.
How to calculate the market size
- Start with the total addressable market (TAM), then determine your target market within that total number, which varies based on geography and other logistical factors.
- Take your target market and determine the penetration potential of your target market.
- Multiply the target market by the penetration rate to find your market size.
Example of market size
Let’s go through an example to explore how you would determine market size.
A start-up wine company
Let’s say you wanted to start your wine business. How to Calculate Market Size: First, you might want to determine how many liquor stores there are in the United States — this will help you determine the overall market you’re looking for. could be sell your product in theory.
After your research, you find that there are 50,000 liquor stores in the United States. Of that total list, you only want to sell to the New England region — including Massachusetts, Maine, and Rhode Island.
You determine that your target market includes the 1,000 liquor stores in the New England area. From here you conduct research and speak with alcohol distributors to determine that there is a success rate of about 40% for wine distribution.
Using this as an example, we would calculate the market size using the following formula:
1,000 liquor stores x 40% = 400 liquor stores
Then, assuming that each liquor store makes $20,000, you can calculate the potential revenue using the following formula:
400 liquor stores x $20,000 = $8,000,000
This means you can make $8 million if you enter 40% of the total market in the New England area – however, this does not take into account your competitors’ wine or all the other liquors available at a liquor store. For this reason, you want to stay conservative in guessing how much of the market size you will gain.
Using Estimated Market Size
Okay, You Have Your Estimated Market Size – Now What?
Market size helps your business answer the following questions:
- How much potential revenue can we earn from this particular market? In other words… is it worth our time and energy?
- Is the market big enough to interest us?
- Is the market growing? Will there still chances of monetizing this market in 3, 5, 10 years?
Market size is a crucial number to know when looking for financing. Investors will need to know how much money you can make in a particular market. In addition, it is vital to determine whether the potential revenues you can make outweigh the costs of your business.
Once you have the market size, you also want to consider how saturated the market already is with your competitors’ products. Ultimately, you can’t conquer the total addressable market (TAM) – some of those people will prefer competitors’ products over yours. So you need to determine if you stand a chance of getting enough consumers out of the TAM to make this a worthwhile venture.