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# What is Market Sizing? Why it’s Important and How to Find it
by  | Jul 8, 2021
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Market sizing matters. Why? Because without it, you won’t be able to create an effective business plan or have a shot at convincing investors that *yours* is a company worth .
Bearing in mind that most investors won’t touch a potential market that’s too small, it’s worth your while spending some time on market sizing before launching your brilliant idea into the world.
But while it may be easy to get on board with market sizing, executing it isn’t always so clear-cut.
In this guide, you’ll learn what market sizing is, why it matters, and how to calculate the market size.
## What is market sizing?
Market sizing is the process of identifying the potential number of clients or customers, as well as the total revenue or sales for a product or service within a given market.
While it’s an important exercise for all businesses to carry out regularly, it is particularly useful for startups and entrepreneurs in the early stages of their business.
Since they often lack primary data, market sizing can give them a rough snapshot of the market share they can potentially capture.
It’s a process of gathering market data from both primary and secondary sources, then piecing that data together to give an estimate of market size and value.
For reference, a primary source will be whatever has the original or first-hand information you’re looking for. A secondary source will have information that they collected from somebody or something else (either the primary source or another secondary source).
To carry out market sizing research, you may use a number of different sources, including government data, competitors’ public records, and your own primary research.
Market sizing can provide data on:
* Total potential market volume and value
* Target customer profiles
* The main competitors
* Investment decisions
* Current trends in a particular market
* The products or services available in that market
Market sizing requires you to make various assumptions regarding your sector, industry, and product or service.
This means that it is not an exact science, and assumptions must be continually refined and reviewed as you gather more data about your market.
## Why does market sizing matter?
Market research is essential for any business. You must understand the people you’re serving in order to provide the products and services that address their needs.
Calculating market size tells you whether a market is big enough to be worth investing in and indicates whether your product or service will be viable.
Market size data is useful when seeking financing, as it gives investors an idea of the market potential for profit and scaling.
Market sizing research indicates which products or services you should offer more of and which you should offer less of. It also tells you whether the market is growing and moving in the right direction for your organization’s goals.
It’s especially important for startups and early-stage entrepreneurs, as it can help you make strategic decisions, such as:
* Organizational design
* Product development
* Marketing strategy
* Distribution channels
## Estimating market size: 3 approaches
Starting your market sizing research process can be daunting if you’ve never done it before. Fortunately, there are a variety of resources available.
By using one, two, or all three of these market sizing approaches, you can collate data from different sources to paint a picture of your target market.
### 1. Top-down approach
A top-down analysis involves gathering information and data from governmental departments and other public entities that collect information on different industries and sectors.
Some of the main governmental sources of information in the US are the Bureau of Economic Analysis () and the Bureau of Labor Statistics (). They provide statistics on market size and share for different industries and sectors.
Trade associations tend to have recent and reliable market data for their industry. They often have information on product and buyer trends. However, they’re not always willing to share this information in order to protect the privacy of their members.
Top-down market sizing can be a challenge because the data we need is not always readily available to the public.
If this is the case, it’s worth contacting governmental statistical departments directly. Sometimes they have information that they’re willing to share.
Sometimes, you might come across a synthetic study that pools together data on a specific market. While this can be useful, it’s worth double-checking the information with the primary sources in case any mistakes have been made while compiling the report.
The data we need is not always available in a convenient form. Sometimes, you have to get creative in your search and look for statistics on something related to it.
For example, if you want information on how many corks are sold each year, and you can’t find anything, you can adapt your search. Searching for the number of bottles of wine sold will give you a roughly similar statistic.
### 2. Supply-side approach
If you can’t find the data you’re looking for within government departments, the data is incomplete, or you simply want to complete your research with more information, you can look at the supply side.
This requires collecting turnover information and sales statistics of the suppliers — i.e., your competitors — in a given market.
The best way to do this is to go straight to the source — look for sales information in company literature and trade publications. This may not always be easy to find, especially for smaller businesses.
If a company offers multiple products or services, estimate the percentage of the total sales that come from the product or service you want to compete with.
For example, if you’re looking for information about sales of apples and you find the turnover of an agricultural company that sells apples, pears, and peaches, you’ll have to estimate what percentage of those sales are apples.
Secondary sources of supply-side data include  and business newspapers and publications, and documentation relating to companies’ production capacity, size, and number of employees.
These can give you clues about their sales volume, although it’s important to note that they’re only very rough estimates.
You may also want to speak to industry leaders and experts to get a better perspective and see how your estimates compare.
### 3. Bottom-up approach
A bottom-up approach means generating your own primary data through a personalized survey that you distribute to your customers via phone, post, or email.
The accuracy of the survey depends on the sample size — the larger the sample, the more accurate it will be. It will also depend on the time and resources you’re able to dedicate to collecting and analyzing survey data.
However, problems with this method can arise when scaling up survey results to market size.
For example, it’s difficult to know exactly which companies sell a particular product. There may be directories, but they tend to be unreliable.
## What are TAM, SAM, and SOM?
TAM, SAM, and SOM are terms that describe different sections of your potential target market. They help you identify the section of the market most likely to buy your product or service.
### TAM
TAM stands for total addressable market. It’s the total market available for your company and all your competitors for your product or service.
It’s unrealistic for most businesses to target TAM, as that would mean being the sole provider in the world of your product or service and having zero competition.
And while that sounds like the dream, it’s rarely the reality.
However, TAM is useful to know when approaching investors. It provides them with the big picture, which helps them get an idea of a startup’s potential revenue and scalability.
### SAM
SAM is the serviceable available market. This is the portion of the market that is most suited to your product or service in terms of price point, geographical location, and quality.
Your SAM represents the potential customers you can gain with your product or service, sales and marketing, and distribution channels.
### SOM
The SOM, or serviceable obtainable market, is the subsection of the SAM you can realistically capture.
The SOM can represent a shorter-term goal for startups since it’s usually unrealistic that they will capture the whole SAM.
The SOM will be determined by your level of market awareness, your available resources, and the presence of competition.
## How to calculate market size in 5 steps (with examples)
Now you have a better idea of what market sizing is, let’s walk through a step-by-step market sizing calculation exercise.
To illustrate the process, we’ll use a case study of a SaaS startup that specializes in social media management.
### 1. Define your ideal customer
Every new business needs to start by defining who its target customer is. This information will inform everything about your business: from product design to marketing strategy, distribution channels, and even customer service.
Your ideal customer is the person (or company) for whom your product or service solves a problem. Therefore, you need to understand their problem intimately, as well as how they think.
Start by creating a target customer profile, then use it to inform your decision-making.
**Case study:** In our social media management startup example, we don’t have any geographical limitations, and our target customer can be anywhere in the world.
We’ve decided to target other startups and companies of between 50–100 employees. Smaller companies may not yet be ready or willing to invest in our service, and larger ones will likely be looking for general business management software.
### 2. Estimate the TAM
To estimate the TAM, or total number of potential customers, you can carry out a top-down analysis or use the supply-side approach, the bottom-up approach, or a combination of all three.
**Case study:** According to the Organization for Economic Cooperation and Development (OECD), there are roughly 300,000 medium-sized businesses in the world, so that’s our TAM.
### 3. Calculate the penetration rate
Once you’ve identified the TAM, you can refine your market share by determining the penetration rate.
The penetration rate will be high for essential products such as toothbrushes. Calculate a lower penetration rate for more specialized or niche products or services.
**Case study:** Most businesses these days have an online presence and social media marketing strategy. We’ve found statistics indicating a penetration rate of 70% for social media management software.
### 4. Calculate the available market volume and value (SAM & SOM)
Targeting the TAM is not realistic for most companies, so the next step is to calculate the volume and value of your serviceable available market, or SAM.
These calculations will give you an estimate of the size of the market share that’s available to your company.
To calculate the available market volume, multiply the total number of target customers by the penetration rate.
You can then find its value by multiplying the market volume by the average value you would expect to make from each sale.
Once you’ve calculated the volume and value of the SAM, you can estimate your SOM. This will be the volume and value you can realistically target with the available resources.
**Case study:** 70% of 300,000 is 210,000 companies. Each sale of our software is worth 5,000 USD, so the available value, or SAM, is 210,000 x 5,000 = 105 billion USD.
Our company specializes in helping other SaaS companies with their social media management. They represent 15% of the 210,000 companies or a SOM of 31,500. The value of the SOM is 156 million USD.
### 5. Apply the data
Once you’ve estimated your market size, you can use it to define business and marketing strategies and seek investments.
Since marketing sizing exercises only give rough estimates, it’s important to revisit your assumptions regularly.
Bear in mind that the market size includes both early adopters and laggards, especially in the case of startups or new technologies.
**Case study:** The early adopters will be the main target market for the first year. Assuming they represent 5% of the SOM, we can further refine it to 4,725 potential customers during the first 12 months.
## Market sizing helps you make better decisions
Market sizing is a process of continuous refining. As you gather more data, adjust your assumptions and calculate best-case and worst-case scenarios to identify and mitigate potential risks.
Despite the time and effort it requires, market sizing is well worth the investment of your resources. It will help you attain vital financing as well as making sure you target the most profitable sections of viable markets.
To learn more about market sizing, check out Pareto Labs’ . And if you want to further your business and investment analysis skills, explore other  that include 200+ practical business lessons.
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