Thursday’s interactive class was on how to guesstimate the size and growth of a market. After an initial exercise on “plummer mathematics” the groups got the chance to apply both bottom-up and top-down market estimates on their projects. We also discussed the difficulties of estimating the market of innovative products that does not exist yet, as well as the common pitfalls of forecasting disruption. 
Business Creation
Advanced Studies in Industrial Economics and Management, KTH Royal Institute of Technology
Business Creation 
I have watch “Startups: Know Your Competitive Landscape and Market Sizing – Stephanie Palmeri from SoftTech VC” (https://www.youtube.com/watch?v=K_w9r88xUPk). As an investor she gives an interesting speech on how a market can be estimated and presented in a credible way.
You should start by making it clear what type of market you are entering. She divides the market into three parts:
1. Existing (you making something better/faster/cheaper)
2. Resegmented market (fundamental shift or a new niche)
3. New market
When presenting the market size you should also consider:
– Market growth
– Competition
– Timing for entering the market
– Monetize on potential on customers
When estimating the size of the market you can have two different approaches, top down or bottom up, but she recommends a combination of them both.
A top down approach start with the total industry estimates and market data and then you try to find how the subsegment and your addressable market is. The total market and your potential market is not the same thing. You should only include customers that you would be able to approach (right countries, languages, technical platforms).
The other way to size the market is with a bottom up analysis. Here you start with number of potential customers and revenues per user per year. Often investors are more interested in a bottom up approach.
When the two analyses are done you should compare the top down and the bottom up approach. If they are vastly different you should dig deeper in to them because then you probably have to rethink some of your assumptions.
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How to Calculate Market Size
av VentureCapTV
– vilka kommer att använda produkten/tjänsten?
– ålder, kön, vart de bor, vad de gör osv
– identifiera vilken typ av information du behöver för att estimera
– online, enkäter, rapporter?
– alt. top-down-approach
– vad säger de bästa analytikerna om marknaden?
– men om pionjär är det svårare
– lite information / få har tänkt på samma sätt tidigare
– alt. bottom-up-approach’
– hämta in information själv
– intervjua och fråga potentiella kunder / suppliers / competition
– svårt att estimera exakt.
– desto mer resurser/tid som läggs desto närmare kan man komma,
– så är en balansgång
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Video: Startup Lessons: How Big is the Market & Calculate Size (https://www.youtube.com/watch?v=3hMjR50cTIw) and also: http://www.angelkings.com/startup/total-addressable-market
The speaker in this video is Ross Blankenship, author and early investor at Angel Kings – a venture capital & angel investing firm and VC fund. As Blankenship has written extensively on topics regarding VC and angel investing and is also an investor, he is qualified to answer the question “how to market seize” in a credible way.
Blankenship suggestion of how to find your TAM (total adressable market) 5 pieces of information must be put gathered:
1. The total population of potential users: This may be a geographical consideration or if a mobile app is considered the population will be the numbers on smartphone users in a geographical limitation plus the forecast of the growth of smartphone users.
2. Definition of the market segment and estimated percent of target customers:
Questions to be answered here are: Who is this product for? Who is likely to want, need, and purchase this product? Are people already buying similar products, and if so, who are those people?
3. How many of the products will be purchased at a time?
Considering a comany selling software thourgh licenses, businesses can purchase multiple instances of the product. However an app is most likely to only sell once to the user.
4. How often will the product be purchased?
Considering a vaccum cleaner bag as a product – it is a product that is a necessity and will be used up, so consumers must refill or restock it.
A software product might be purchased only once but new versions and upgrades could be monetized.
5. What is the intended selling price of the product?
if it is an app, the company could set a price or let the app be free for customers and monetize it thourgh adds and in-app purchases. In this case you must project how much money the app will generate per user.
The forumula for the TAM uses the above information in an equation:
Number of potential users * Percentage targeted audience * number of ourchase at a time * number of repeats * price = maximal potential market share.
The number you get might be very high and not 100% correct which is why it is important to assume that the number is a bit off. However, the more specific your market definitions are the better the number of TAM will be (even if it reduces the market seize quiet alot). Also back most of your assumptions with data and statistics from numerous sources and not only one. One last piece of advise is to think of secondary demands (branding) even if the product is a primary demand.
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