Understanding Market Sizing & Valuation

Let’s say that you have several years thinking, executing and building your business and bringing it up to your customers. Despite having all the required things for a successful business like a good product and service, a huge brand and goodwill, the customers love what you are offering, still business is running in loss. The major reason is that you do not have an effective and good customer base. You need to know where you are moving ahead to achieve a defined goal or else it will be of no use to walk on that path. So, reviewing and defining the target market is very important in any business. Let’s look at how we can analyse and break down the basics of Market Size so that we can make the decisions wisely.

What is Market Sizing?

Let’s put it simply first, the total number of customers or should say potential revenue generated by these customers is the simplest definition of Market Sizing. The figure of market sizing can be defined and measured in form of total number of consumers you have or total revenue the consumer represents or the total transactions has been done per year.

The market size usually used to calculate the approximate profits from the sale of services or goods business does. This value or market sizing provide you the idea and clear view to make your further plans and making strategic decisions in your business. Besides important parts of a business like analysing market trends, profitability, sustainability, competition and critical success factors, measuring market sizing is also an integral and important part. When you are starting the business, market research is an important part, and for market research, determining market size is an important part. If you are able to determine and value your market size correctly then you have big

Why Do Market Sizing?

There are several factors and reasons why business start-ups are interested in market sizing.

To get and grab Investments

For all the start-ups, especially who are interested in third-party financing such as venture capital, sizing the market is a necessary and important task. Differences may be there in the ideas and business philosophies, but most of the VCs and Investors would like to know where they are investing in the market and what is the potential of the business. If a start-up can show and prove that they have a good chance of making a good (including how much) money and be successful, it is easier to grab the big investment.

 To Develop Business Strategy

At times, as a business owner and entrepreneur, one will need to think and work on their business strategies for expansion of the business. Even if your business does not require any financing from investors, understanding and valuating the market sizing is essential for quick strategic decisions such as product development & improvement, selling & distribution, organization structure, etc. The market is divided in various segments and you can analyse the segments of current market to shortlist the section you want your product to target and reach.

To Define Budget

As mentioned above, once you analyse your target consumers through the estimation of the market size, you can accurately define the amount of money which will be required for applying the business strategy you have planned.

Plan your Future and Growth

Once you know the potential growth your business promises to have, it makes it easier for you to know the hiring process you need to determine and when you will need additional manpower. Effective planning will lead to faster growth and gradually, increase in the Market Size of the Business.

How to Define Market Sizing Research?

The very first step to create an effective market sizing is to define the market in which you’ll be having your consumers. Few questions to keep in mind before you do maths and calculate the market sizing:

• What will be the customer type who will purchase your product?
• Any specific geographical area these consumers will be? If yes, then where?
• Any demographic factors (age, income, etc) which can limit your market size?
• Who are the competitors and what they are doing in the market? How much portion of the market do they have or hold?

Run these questions and other your own as well through your mind once and think about the outcome. Once you have done this then the next step is to calculate market size segments.

How to Calculate Market Size?

You already have an amazing new product or business idea you’re ready to launch, but you are not sure about sales potential? You think about the future revenue as well but do not know where to start. Then your first step will be to calculate the size of your market.

Calculate the various market size segments: TAM, SAM, and SOM.

Calculating Total Available Market (TAM)

Find out details about these three methods used to calculate TAM

I. Top Down

In this approach, you start with universal data set that is all consumers and filter it down to your target market with factors like location, purchase habit, demographics, etc.

This will help you understand the assize of a market very easily but it may not provide the in-depth detailed analysis you might require.

II. Bottom Up

This method is regarded the most accurate and effective method of defining TAM. It takes current sales revenue and predict and conclude it to the larger market.

The calculation is being done by multiplying annual contract value (ACV) by the volume of total accounts in the market from larger enterprises to mid-market to small size business.

III. Value Theory

Unlike other two methods where we use existing revenue data, this methodology used for assessing the value of new product or product expansion and improvement which does not exist in the market.

As there isn’t any data for the product, this calculation of market size is equal to total number of consumers multiply  with estimated assumed price of the product.

Based on method you choose for calculation of the market size, you will need to get additional relevant information to make your calculations through secondary or primary research.

Secondary research

Also known as desk research, it involves searching the public domain for further information. You can search various things like SEC filings, Census data with the help of internet that too free of cost. The only drawback of desk research is that there is lot of outdated information and also there might be some incorrect information as well on the internet.

Primary research

This is usually the first-hand data which you have gathered and is often used to complement the secondary search efforts you have put in.

Calculating Serviceable Addressable Market (SAM)

Unless your business hold the monopoly, TAM and SAM may seem similar but they are very different. Measuring your serviceable addressable market allows you to set more realistic and specific goals for your business.

• Finding the market size of your serviceable addressable market involves the method to narrow down your TAM to the specific consumers who will have the benefit from your product or service. For an example, if you are selling athletic sports footwear, then you need to remove part of TAM which have revenue from work boots, dress shoes and party shoes,
• Once you filter and narrow down your consumer base, you need to calculate the average revenue these consumer base will spend and multiply the two Putting it simply (No. of consumers) * (Annual revenue)

Calculating Share of Market (SOM)

After getting the percentage of the market your company holds, you get the idea on how much revenue you can earn and where are you standing in the market in front of the competitors.

To calculate SOM, you’ll need to calculate and have the correct information from both this year and last year. Using the years 2021 and 2022, the formula will look like this:

• Step One: (Revenue 2021 / SAM 2021). This gives you your SOM in 2021
• Step Two: (SOM 2021) * (SAM 2022). This gives you your SOM in 2022

Now, you know how to calculate all three layers of market sizing and you have the date with you. Start building your pitch deck and strategy for the market approach and product innovation that will take your business to new heights.

Conclusion

It is important to know and understand the key aspects of the business to have a successful business ahead. It does not matter the size and scale of the business you have, what matters is you must look at the market sizing issues. You must have an effective market sizing calculation to have the effective working of your business. Therefore, knowing the right market size cannot be ignored by entrepreneurs and business start-ups.

Contact us now, and get in-depth idea and knowledge about the market valuation, start-up valuation and how to calculate market sizing for your company or start-up and define the strategies ahead based on your company profile. Visit our site to learn more about our valuation services and other aspect of start-up valuation: https://myvaluation.in