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Market Sizing

4 min read

Total available market - all of the people that can use the product - Overall revenue opportunity available for the product

The overall population that presents a revenue opportunity for your product comes under this category.

Serviceable available market - who it can service - % of market that can be serviced realistically

The proportion of the population that can be reached realistically comes under this category.

Target market - TAM - SAM - The consumer segment for whom the product is created for and who will use it

This is also known as the serviceable obtainable market (SOM). The users your product actually caters to and who will buy it come under this category.

Top-Down Approach to Market Sizing

See if from the top and reach down or drill down to the target market

From the entire market, you determine the number of customers and the level of consumption to arrive at the target market

Bottom Up Approach to Market Sizing

Do the opposite - look at one store or one product and then determine the Serviceable Available Market from there

You estimate the potential sales for a single business in the market and, from it, arrive at the total sales figure

Through the bottom-up approach, the total sales figure you get is the product of the number of potential customers in the market and the price of your product. Say you’re the product manager of a B2B SaaS  (Software as a service) product, like Freshdesk. SaaS operates on a per-seat basis, so you would consider the number of seats rather than the number of customers. Suppose your software is priced at 1,000 per seat, and the number of potential seats in the market is 500, then the market size comes to 5,00,000.

Data Collection

  1. No. of customers
  2. Money spent
  3. Product usage - use cases and how often

Example

Weekend travellers product at a travel company where they are trying to book a weekend getaway

TAM - People who prefer staying in a resort

SAM - Weekend travelers out of major metros in India & resorts within a certain radius of these metros

Target Market - Customers who are willing to transact and pay online

Ungraded Assessment

  1. Suppose you are giving an interview for the position of product manager. During the interview, the interviewer asks you to estimate the market size of diapers for children in India.

    Which of these data points would you need to estimate in order to arrive at the final sizing?

    • Average Selling price of a diaper
    • Percentage of children who use diapers
    • Diaper usage per children
    • All of the above

  2. Write down the assumptions which you will need to make to estimate the market size of diapers in India.

  3. If you would have to estimate the diaper market size using the top-down approach, how would you go about it? Please note that you just need to explain your approach step-by-step. No need to go into actual numbers and calculations.

    Let’s keep in mind that the top-down approach makes use of the following formula:

    Total Market Size = Average price of a product x (new demand for product + the replacement demand for the product)

    We will start off by calculating the replacement demand. Replacement Demand is equal to the Estimated number of products over the lifespan of a product.

    To calculate the estimated number of diapers, we need to

    • Find out the total population of India and multiply that by the percentage of children population in India up to the age of 4.
    • Assume the rate of change of diaper per day and calculate the number of diapers that will be used per day by multiplying it with the population of children aged up to 4

    From here we calculate the replacement demand by assuming that the average lifespan of a diaper is around 2-3 hours.

    Then we calculate the new demand for the product. New demand is the estimated no. of product times the growth rate. We can assume a growth rate for the same.

    Now that we have calculated the new demand and the replacement demand for the diapers, we can use the formula to calculate the total market size. We can make an assumption for the average price of a diaper.

References

  1. Understanding Market Sizing - An initiative by A Junior VC to learn concepts in a comic book format

Consulting Case Interview:

Product Management Estimation Interview:

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