Market Sizing For the Early Stage Company

Flea Market #1Developing credible market sizing is important for your investors, your plans and your sanity (You want to have a good sense of the market you are attacking and manage your own expectations about the same.) There are three ways to do this, which I will describe here, from least to most granular (and, in some ways, from least to most useful).

The Swag

The first, typically used in elevator pitches is, the overall size of the market – usually pulled from analysts: “Small businesses spend over $XX BN on software annually…” Good for a quick gut check – I worked with a founder who had developed an elegant SaaS platform to support a specific business process. So specific that I figured out, by estimating the number of firms that might purchase it, how many seats he could sell and what they would pay per seat per year, that the potential market just wasn’t that large.

Top Down

The next method is to do some top down analysis using Census Bureau and Bureau of Labor Statistics data. To do this, you first need to have a handle on the NAIC (SIC) codes that you will sell into. Then, you need to have a good sense of the size(s) of company (by revenue or headcount) that you will sell to within these industry codes. (See also my video post “Defining Your Target Verticals“)

With these two factors you can develop company counts for the size bands and industry codes you are targeting (You can also do this geographically) from data available on the above-noted web sites. I find these site a little complicated to navigate but if you persist you will find the data you need.

You can apply an average sale price (in MRR or ACV) and a market share to the business count you develop for each segment to size your addressable market and then derive the revenue potential for your offering.

Bottoms Up

The third method of market sizing is to build a list of target companies and apply a sales price to each that varies based on specific company factors. This can be tedious and works best when you have a somewhat narrow market (e.g. you will initially sell your product in one state) whose participants are easy to identify.

If possible, develop market sizing by all three methods to ensure that your numbers are somewhat consistent. Somewhat optimistic figures are helpful, insanely optimistic figures less so.

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