Ins and Outs of Sizing a Market in No TimeLast Updated on: October 25, 2013

Table of Contents• Overview on Science of Market Sizing

• Understanding How to Think About a Market Opportunity• Total Market Potential• Total Addressable Market (TAM)• Segmented Addressable Market (SAM)• Expected Share of Addressable Market (ESAM)

• Opportunity Size Triangulation – 3 Ways to View an Opportunity• What’s The Difference Between Top-Down and Bottoms-Up Approaches

• 7 Quick Market Sizing Approaches• Quick Top-Down Market Sizing• Analyst Spend Statistic Market Size • Census-Based Market Sizing • LinkedIn-Based Market Sizing • Directory-Based Market Sizing • Power Curve Market Sizing • Resource Constraint Angle on Sizing

Overview on Science of Market Sizing

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Understanding How to Think About a Market Opportunity

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• 4 ways to think about market size. Knowing the level of detail necessary to address your concerns is key to properly scoping the problem and approach.

Total Market Potential• Definition: The potential sales value of a particular product or service within a specific target

segment over a specified time frame.

– How is it calculated?• Total Market Potential = (# of Opportunities) x (Average Selling Price of Opportunities) • Best to do this calculation at segment by segment level, not as an overall market.

– Important Assumptions:• Company can win 100% of market opportunities.• All opportunities within market are there for the taking.• Price is consistent across market.

– Costs & Benefits:• Statistic can be estimated in hours, not days.• Useful for quickly understanding the potential for a B2B market opportunity in terms of

magnitude.• Always grossly overstated, due to over-simplification.

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Total Addressable Market (TAM)• Definition: The potential sales value of a specific target segment over a specified time frame that

takes into consideration the available demand for a particular service or product.

– How is it calculated?• TAM = (# of Opportunities) x (% Targetable Opportunities) x (Average Selling Price of

Opportunities)• Targetable opportunities can be estimated via a market research survey or an

assessment of current market penetration. • Best to do this calculation at segment by segment level, not as an overall market.

– Important Assumptions:• Company can win 100% of its targetable opportunities.• All opportunities within targetable segment are there for the taking.• Price is consistent across all segments and customers.

– Costs & Benefits:• Provides more realistic picture of market opportunity than total market potential.• Always overstated• Statistic can be estimated in a day or less if willing to use publicly available data to

estimate percentage of targetable opportunities.

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Segmented Addressable Market (SAM)• Definition: The potential sales value of a specific target segment over a specified time frame that

is limited to available demand for a particular service or product that can be addressed via a specific business model and strategy.

– How is it calculated?• SAM = (# of Opportunities) x (% Targetable Opportunities) x (% Opportunities Targeted

as Part of Business Model) x (Average Selling Price of Opportunities)• The segment or business model addressable opportunities can be estimated via more

targeted market research.

– Important Assumptions:• Opportunity tomorrow is same as opportunity today.• Company can win 100% of its segmented or business model addressable opportunities.

– Costs & Benefits:• Provides a more accurate estimate of actual revenue potential of a market or segment.• Requires a more involved process, as you have to understand what percentage of the

market would be addressable via your business model. • Inputs into calculation are difficult to come by and may require primary research which

can be very costly and time consuming.

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Expected Share of Addressable Market (ESAM)• Definition: The portion of the segmented addressable market sales value expected to be won, due

to a given produce or service, over a specified time frame.

– How is it calculated?• ESAM = (Expected Win Rate) x (Segmented Addressable Market) x (Average Selling Price

of Opportunities)• The win rate can be proxied by win rates in other similar segments or estimated via

market research.

– Important Assumptions:• Opportunity tomorrow is same as opportunity today.• Win rates are same across segments.• Opportunity tomorrow is same as opportunity today.• Price is consistent across all segments and customers.

– Costs & Benefits:• Statistic provides most accurate estimate of actual market opportunity. Although

typically understated.• Inputs into calculation are difficult to come by and may require primary research which

can be very costly and time consuming.

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Developing a Clear Market Definition• What is a Clear Market Definition?

– A series of externally identifiable characteristics that identify the group of companies who would likely have a need for product/services and could reasonably be expected to consider purchasing product/service or a competitor’s product/service within a given time frame.

• 6 Key Factors To Consider When Developing a Market Definition:

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Market Definition

Relevant Good/ Service

Minimum Viable

Opportunity

Resources

Timeframe

Costs

Opportunity Limitations

Legend

Business Factor

Outside Factor

Opportunity Size Triangulation – 3 Ways to View an Opportunity

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Opportunity Size

Top-Down:Percentage of total revenue in current market

Bottoms-Up:Customer or competitor customer spend on this category

Resource Constraint Sizing:Ability and cost to serve market within time and resource constraints.

What’s The Difference Between Top-Down and Bottoms-Up Approaches• Its all about how you view the market and what this enables you to see or prevents you from

seeing.

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7 Quick Market Sizing Approaches

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Quick Top-Down Example

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• Question: What is the market size for commercial printing services?

• Who are their target customers?– Can we bucket each profiled customer by industry or another easily identified

attribute?– Is there a minimum employee or revenue threshold to afford or need these services?

• We can use analyst firm IT Spend Statistics to figure this out.• Minimum Revenue = Average Sales Price (ASP) / (% Revenue Spent on IT * %

Allocation of IT Budget Towards technology Area * % Take of Technology Allocation )

• How many companies are in each of these target industries with the specified characteristics?– We use CapitalIQ, Jigsaw.com, LinkedIn.

Quick Top-Down Example Continued

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• How much will customers be willing to spend on printing per a year?– Can we estimate this from their current customers?– If not, can we approximate number using publicly available competitor data?

• Key: Must be uniquely focused on space or breakout revenue in financial reporting.• CapitalIQ and 10-ks are great sources for customer and revenue.

• We have a range, so conservatively estimate a high-end ($500k) and low-end ($200k)

• Putting it all together to calculate a market size:

Analyst Spend Statistic Market Size Example

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• Question: What is the market size for disaster recovery services for a company who sells to utilities and charges a minimum of $1,000 per a month for this type of service?

• What is minimum revenue for utility that would be likely to purchase DR services at this price point or higher?– We can use analyst firm IT Spend Statistics to figure this out.

• Gartner overall spend statistics• Forrester DR/BC IT Spend Allocation Report

– Minimum Revenue = Minimum Sales Price / (% Revenue Spent on IT * % Allocation of IT Budget Towards technology Area * % Take of Technology Allocation )

– Minimum Revenue = ($1,008*12)/(.062*.013*1.00) = $15,000,000

Company Annual Revenue

Employee Count

Allocation of revenue to IT

budget (Utilities)

Allocation of IT

budget towards Target "take" %

Monthly Service Price Can Afford

Inputs 0.9 6.2% 1.30% 100% 12$5,000,000 6 $310,000 $4,030 $4,030 $336

$10,000,000 11 $620,000 $8,060 $8,060 $672 Basement $15,000,000 17 $930,000 $12,090 $12,090 $1,008

$20,000,000 22 $1,240,000 $16,120 $16,120 $1,343 $30,000,000 33 $1,860,000 $24,180 $24,180 $2,015 $40,000,000 44 $2,480,000 $32,240 $32,240 $2,687 $50,000,000 56 $3,100,000 $40,300 $40,300 $3,358 $75,000,000 83 $4,650,000 $60,450 $60,450 $5,038

$100,000,000 111 $6,200,000 $80,600 $80,600 $6,717

Analyst Spend Statistic Market Size Example Continued

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• How many utilities generate less than $15 million in revenue per year in the United States?– Looks like there are a couple good sources to make estimate: LinkedIn,

US Energy information Administration– Need to convert revenue into an employee count to use LinkedIn. This can be done using an

industry revenue to employee multiplier.

• We can estimate total market opportunity without ASP since we have a canonical revenue list.– Total Market Opportunity = ∑(Revenue* (% Revenue Spent on IT * % Allocation of IT Budget

Towards DR/BC) = $248,000,880

• What is our expected take of this market?– Let’s use our current overall win rate of 25%.– So total market opportunity = (25% * $248,000,880) = $62,220,000

Source Number of Utilities ConfidenceLinkedIn 1309 MediumUS Energy Information Administration 1,225 HighBest Estimate 1,225 High

Census-Based Market Sizing Example• Question: What is market size for firm who sells to US-based

architecture firms with greater than $2.5M in revenue and an ASP of $5,000 per year?

• How many US-based architecture firms are there with greater than $2.5M in revenue?• Employee to Revenue Conversion: 20 employee minimum• Find NAICS Codes for target space: 54131 and 54132 • Finding right Census Dataset - focus on dataset that is most

granular with firm size on low-end.

• Note: Hierarchical data so components are only additive when have same number of NAICS digits.

• What is the overall market opportunity for this firm?– Target Market Opportunity = Number of Opportunities * ASP =

(1857+365) * 5,000 = $11,110,000

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Multiple relevant NAICs for a specific

sector. Sometimes at

different hierarchy in

data.

LinkedIn-Based Market Sizing Example• Question: What is market size for firm who sells to US-based architecture firms with greater

than $2.5M in revenue and an ASP of $5,000 per year?

• How many US-based architecture firms are there with greater than $2.5M in revenue?• Employee to Revenue Conversion: 20 employee minimum• Identify parameters and determine if need to qualify by advanced keywords search.• Determine if opportunity at firm or location level.• Pull Counts by Company Size Ranges

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Any Size

Not Specified 1 to 10 11 to 50

51 to 200

201 to 500

501 to 1,000

1,001 to 5,000

5,001 to 10,000 10,000+

None Architecture & Planning

Location Count 7,326 1,121 3,514 1,917 632 91 22 24 2 3

None Architecture & Planning

Headquarters Only 6,637 1,004 3,132 1,767 601 87 20 21 2 3

Architectural Services

Architecture & Planning

Location Count 1,239 158 588 375 97 15 1 5 0 0

Architectural Services

Architecture & Planning

Headquarters Only 1,098 135 510 338 95 15 1 4 0 0

Architectural Design

Architecture & Planning

Location Count 2,080 269 1,038 584 159 21 3 6 0 0

Architectural Design

Architecture & Planning

Headquarters Only 1,827 231 888 527 153 20 3 5 0 0

Architectural Landscape

Architecture & Planning

Location Count 141 19 69 32 18 1 0 2 0 0

Architectural Landscape

Architecture & Planning

Headquarters Only 125 17 61 27 18 1 0 1 0 0

Search Term Category Type

Company Count by Employee Size

LinkedIn-Based Market Sizing Example Continued• Estimate composition of company size range that overlaps cut-off point using alternative

source like Census Data.• Quarantine any data that does not need to be included in transformation to minimize

exposure to assumption.

• Apply conversion ratio to LinkedIn estimate and calculate number of opportunities:

• What is the overall market opportunity for this firm?• Target Market Opportunity = Number of Opportunities * ASP = (960+189) * 5,000 = $5,745,000

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SegmentNumber of Firms Total 0-4 5-9 10-19 20-99 100-499 500+

Number of Firms >10 <20 20-99 100+

Architecture Services 23,581 14,704 4,482 2,481 1,599 262 53 4,395 56.45% 36.38% 7.17%

Firm Population Ratio

ApproachLess Than 20 Employees

100 Employees

or More TotalLinkedIn Category: "Architecture & Planning" 5,033 193 6,205LinkedIn Search: "Architectural Landscape" 99 4 122LinkedIn Derived 4,934 189 6,083

19979

20 to 99 Employees

960

Directory-Based Market Sizing Example• Question: What is market size for firm who sells to US firms in Financial Service industry with at

least 1,000,000 customers and an ASP of $100,000?

• What does this target market entail?• Can it be broken-down into sub-markets?

• FDIC Insured versus Non-FDIC Insured• Type: Commercial Bank, Retail Bank, Asset Management Company, etc.

• What is definition of Opportunity?• Firm, location, division?

• How many US-based financial service firms are there with at least 1 million customers?• Identify Directories

• Government Directories: Regulatory Agency and Regulation directories and databases• Private Directories: Top firm lists, Association membership lists, licensing organizations

• Does any combination of directories allow for us to directly or indirectly estimate customers and cover the whole space we are interested in sizing?• FDIC Insured US Banks Database• Towers Watson 2012 Top 500 investment firms

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• Build list of companies by sub-market

• Review data on companies to see what might be able to be used to estimate customers• Assets under management looks the best as it is available in both sources.

• Convert Assets Under Management to Customers for list of companies.

• Create combined list of firms with at least 1 million customer, dedup and count. We get 119.

• What is the overall market opportunity for this firm?• Target Market Opportunity = Number of Opportunities * ASP = (119) * 100,000 = $11,190,000

Directory-Based Market Sizing Example Continued

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Wells Fargo TD Bank AverageCustomers 70,000,000 20,500,000Assets 514,853,000,000 $98,613,149,000Average Assets Per Customer 7,355 4,810 6,083

Power Curve Market Sizing Example• Question: What is market size for company that

sells to accounting firms with $20 Million in revenue if their ASP was $100,000 per year?

• How many accounting firm opportunities are there?• Prior Knowledge: This space is dominated by

the Big 4 (Ernst Young, KPMG, Deloitte, PWC).

• Hypothesis: May be extremely consolidated space, whereby we can use power curve to estimate.

• Validate Hypothesis: Power curve hypothesis is validated by Chart of top 25 accounting firms by revenue and then top 100 firms by revenue to confirm theory. • Not strong enough to answer question

outright if need an exact number.

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Power Curve Market Sizing Example Continued

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• What is total revenue of accounting market? • The top 100 firms account for

$49,468,330,000 and the total accounting market is $374,000,000,000. However, this seems to include lots of other spaces.

• Can we estimate employment composition for top 100 versus rest of market?• No public data on this.

• Last resort, can graph revenues of top 100 and extrapolate out.• 108 firms in target

• What is overall market opportunity for firm?– Target Market Opportunity = Number of

Opportunities * ASP = 108 * $100,000 = $10,800,000

Resource Constraint Angle on Sizing Example• Question: What is the market opportunity 1- year out for a firm selling marketing

automation software to financial service firms with at least 50 million in revenue?

• Resource Constraints:• Can bring on board 5 salespeople within budget this year• Each salesperson can make 10 phone calls a day that get through to a

prospect • 3 weeks of vacation per employee• 25% of attempts will convert into opportunities• 20% of opportunities will convert into sales• 5% of the sales calls will convert within six months• ASP $240 revenue per year

• Insight: Market size looks big enough to withstand well over a year of growth, so real constraint is company’s own resources.

• What can we expect the sales to be after first year of operation?• 10 calls/day x ((365 days/year - 21 vacation days)*(5/7)) x 25% opportunity

conversion rate * 20% sales conversion rate x $240/sale x 5 salespeople = $147,000

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