How to Calculate Market Size in 8 Steps

When you have a new product, service, or business idea, you'll need to calculate the market size to fully gauge its potential.

Using the steps outlined below, you can get a more accurate understanding of your market size. This will give you a better understanding of your total revenue potential and help you make informed decisions with your investments, resource allocation, and strategic planning.

1. Define Your Target Market

Defining your target market is a foundational step in estimating the size of your market. This process involves identifying the demographic, behavioral, or psychographic traits that apply to your target market.

For example, if you were an Electric Vehicle (EV) company that mainly produced luxury EVs, you may define your target market as those with an income over 150,000 per year, generally between the ages of 30 and 60, who live in large cities.

2. Gather Consumer & Market Data

The second step is to collect and synthesize information from diverse primary and secondary research sources to better understand your industry/market landscape.

You can collect primary market research data firsthand through surveys, focus groups, interviews, and observational studies to gain insights into consumer behavior, preferences, and market trends.

Secondary data sources encompass existing information from published reports, industry databases, government publications, academic studies, and market intelligence platforms. This data type offers valuable context, historical trends, and industry benchmarks.

Combining primary and secondary data sources gives you a comprehensive understanding of your unique market.

3. Identify Key Variables

Identifying key variables is a critical aspect of a market analysis, allowing you to discern the underlying drivers shaping your market's size, growth potential, and competitive landscape.

These variables include:

Economic indicators

Technological advancements

Regulatory frameworks

Competitive positioning

Consumer behavior patterns

Following up on our recent example, key market variables for an Electric Vehicle company could include government incentives for EV adoption, advancements in battery technology for improved driving range, infrastructure development for charging stations, shifting consumer perceptions of EV performance, and regulatory mandates aimed at reducing carbon emissions.

By analyzing these key variables, you can gain a better understanding of the market dynamics at play and what they mean for the potential growth (or contraction) of your target market.

4. Determine Your Total Addressable Market (TAM)

Your Total Addressable Market (TAM) represents the theoretical upper limit of revenue opportunity for your particular product or service within a given market under ideal conditions.

Calculating TAM involves estimating the total number of potential customers (market size) and multiplying it by the average annual spend per customer.

This approach provides a broad perspective on the market's revenue potential, serving as a reference point for assessing the attractiveness of an opportunity. However, estimating TAM can be challenging due to inherent uncertainties, such as variations in consumer preferences, competitive dynamics, and external factors like economic fluctuations or regulatory changes.

That is why you need to use multiple data sources, employ smart methodologies, and validate your assumptions with data to derive an accurate TAM.

To calculate TAM, businesses may utilize various approaches, like:

Top-down analysis: Extrapolates market size estimates from macroeconomic indicators or industry reports, providing a high-level view of the market opportunity.

Bottom-up analysis: Aggregates data from individual market segments or customer cohorts, providing a more granular perspective on revenue potential.

Market segmentation: Techniques such as demographic segmentation, geographic segmentation, and psychographic segmentation enable you to tailor TAM estimates to specific customer segments or market niches, capturing nuances in consumer behavior and preferences.

5. Estimate the Serviceable Available Market (SAM)

The Served Available Market (SAM) represents the percentage of the Total Addressable Market (TAM) that is realistically accessible to a business. It represents a specific market segment that aligns with your business's capabilities, resources, and focus. Because, as you likely know, only some customers within your TAM will be a perfect fit for your business.

You can start estimating your SAM by defining your target segment (or segments) within your larger TAM. If you aren't sure of what these segments are, you should use a market segmentation tool (like this one) to find the unique audiences within your market. After evaluating this number, you can multiply it by the annual value per customer.

This calculation would give you a solid SAM number.

6. Calculate the Share of Market (SOM)

Your Share of Market (SOM) represents the percentage of the total market a business currently commands regarding revenue or units sold.

You can calculate SOM by multiplying last year's market share by this year's SAM. If you aren't sure of your market share from the previous year, you can divide that year's revenue by its SAM.

Calculating SOM provides insights into your competitive position and market penetration, enabling you to assess your market performance and identify opportunities for improvement.

7. Validate and Refine Estimates

Once you know the percentage of your market that is a good fit for your business and your current market share, validation and refinement are the next steps in your analysis process. This will help you ensure the accuracy and reliability of your findings.

Validation and refinement involve scrutinizing your assumptions, testing additional hypotheses, and cross-referencing multiple data sources to validate the accuracy of your estimates.

You can employ various validation techniques, but conducting primary research, like surveys, interviews, and focus groups, can provide valuable insights from real customers in your market, helping to refine your estimates and address any gaps or uncertainties in the data.

8. Monitor Market Dynamics

Market dynamics are an ever-evolving factor. Advancements in technology, economic trends, regulatory changes, and consumer preference shifts can all significantly impact your business.

Continuous monitoring of market trends, competitive developments, and customer feedback is essential for staying informed and adapting your market size estimates accordingly.

You can leverage a variety of tools and techniques, including market research studies, competitive intelligence platforms, social media monitoring, and customer feedback mechanisms, to track changes in the market landscape and identify emerging opportunities or threats. By staying agile and responsive to changes in market dynamics, businesses can refine their strategies, capitalize on new opportunities, and maintain a competitive edge in the marketplace.

Calculating Market Size with SightX

SightX is an AI-driven platform that makes it simple to collect robust market and consumer research insights. While powerful enough for insights teams at Fortune 500 companies, our user-friendly interface makes it simple for anyone to start, optimize, and scale their research. 

With our Generative AI consultant, Ada, you can harness the power of GPT to build surveys and studies in second. And once your data is collected, Ada will analyze, summarize and report on your findings, picking out key insights in seconds and making recommendations on ways to apply the feedback to your concepts. 

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Let us show you how simple it can be to collect powerful consumer insights.