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Estimating
Market Size
Mike Panesis
Seminar Schedule
§  Business Models
•  Canvas, 1/16/13
•  Environment, 1/22/13
§  Marketing
•  Sizing a Market, 1/29/13
•  Product & Promotion, 2/5/13
•  Pricing & MarketValidation, 2/6/13
§  Operations, 2/12/13
§  Finance
•  Basics, 2/19/13
•  Planning, 2/20/13
•  Measurement, 2/26/13
§  Teams, 2/27/13
§  Technology, 3/5/13
§  Law
•  Intellectual Property, 3/12/13
•  Company Formation, 3/13/13
§  Investors
•  Financial, 4/2/13
•  Strategic, 4/9/13
•  Presentation, 4/16/13
2
Markets & Marketing
Markets
§  How big is the opportunity?
Marketing
§  Communicating yourValue
Proposition
§  3 P’s
•  Product (or Pservice)
•  Price
•  Promotion
3
This is your Business Model Canvas…
4
…Business Model Canvases are CONNECTED
5
A Market is the mechanism by which a business delivers
its value proposition.
6
There are at least two roles
in a market:
Buyer
Seller
Most markets consist of chains of buyer and seller
relationships.
7
Buyer
Seller
Buyer
Seller
Component Suppliers
Contract Manufacturers
Apple
Mac Owner
Market Size
§  Quantifies the financial potential of your business.
§  Helps you refine Business Model Canvas hypotheses:
•  Very small market size may not be worth pursuing.
•  May be difficult to gain traction in a gigantic market.
§  Two measurements:
•  Money (usually USD)
•  Units
§  People
§  Consumption (e.g. washloads, room nights, kilowatt hours, etc.)
8
Three Market Size Estimates
§  Total Addressable Market (TAM):
Value of all of the buyer/seller
relationships participating in the
market.
§  Served Addressable Market
(SAM):The part of the TAM for
which your business model’s
value proposition is strongest.
§  Target Market: (Usually)
demographic segment of the
SAM with the most direct path
to success.
9
SAM
Target
SAM
TAM
Total Addressable Market (TAM)
§  Quantifies the entire chain of buyer/seller relationships in your
market.
§  Only need to estimate the value of the relationships at point of
consumption (incorporates the value of all relationships in the chain)
§  Usually very broad.
§  Easiest to estimate.
§  Examples:
•  Mobile apps
•  Energy consumption
•  Health & fitness
10
Served Addressable Market (SAM)
§  A value proposition rarely applies to an entire TAM.
§  Opportunity to sharpen your focus on a particular part of the market.
§  If TAM and SAM aren’t that different, just estimate an addressable
market.
§  Examples:
•  Mobile healthcare apps for seniors
•  Self-generated renewable energy storage
•  Health & fitness at work
11
Target Market
§  Process not that different than for SAM.
§  One more level of refinement.
§  Often a demographic target.
§  Examples:
•  Mobile healthcare apps for seniors, targeting retirement homes and large
gerontology practices.
•  Self-generated renewable energy storage, targeting the oilfield services,
food manufacturing and automotive industries.
•  Health & fitness at work, targeting new male employees aged 25-40 in
companies with annual sales of $500M or more.
12
TAM, SAM andTarget Markets?
13
TAM, SAM andTarget Markets?
14
TAM, SAM andTarget Markets?
15
TAM, SAM andTarget Markets?
16
Quantifying Market Size
§  If you’re lucky:
•  Find an industry or market study that fits your business model
§  If you’re not:
•  Build a market model
§  Important to differentiate:
•  Facts
•  Assumptions
•  Extrapolation Algorithms
§  Run multiple scenarios
§  Two time frames:
•  Now
•  In 5 years
17
Example
18
§  The internet revolution changed the travel industry forever. But it didn’t change the
whole travel industry.
§  The travel industry’s meetings & events segment is hampered by inefficient business
processes and ineffective pricing models that do not leverage modern technology,
especially for hotel accommodations.
§  GroupRes is Software as a Service (SaaS) that makes it easy for event guests to
reserve a hotel room, while increasing profit for event planners and hotels.
Example
19
$35
$26$6
$18
$28
Total	
  Addressable	
   Market	
  (TAM)	
  of	
  
Accommodations	
   represent	
  the	
  
largest	
  share	
  (31%)	
  of	
  T&E	
  Spending	
  	
  
for	
  U.S.	
  Meetings	
  ($113B	
  Total)
Accommodations Food	
  &	
  Beverage Car	
  Rental
Air	
  Travel Other
$Billion
Source:	
  PwC
$29.7
$1.8
$3.5
Served	
  Addressable	
   Market	
  (SAM)	
  is	
  
$5.3B,	
  or	
  15%	
  of	
  spending	
  on	
  
commissions	
   and	
  fees.	
  
Net	
  to	
  Hotel Technology	
  Fees Commissions
Example
Year 1	
   Year 2	
   Year 3	
   Year 4	
   Year 5	
   Year 6	
  
Market	
  
>Meeting Growth Rate	
   0%	
   0%	
   0%	
   0%	
   0%	
  
Meetings	
   1,800,000	
   1,800,000	
   1,800,000	
   1,800,000	
   1,800,000	
   1,800,000	
  
Room Nights/Meeting	
   139	
   139	
   139	
   139	
   139	
   139	
  
Room Nights	
   250,000,000	
   250,000,000	
   250,000,000	
   250,000,000	
   250,000,000	
   250,000,000	
  
Room Nights/Reservation	
   2.5	
   2.5	
   2.5	
   2.5	
   2.5	
   2.5	
  
Reservations	
   100,000,000	
   100,000,000	
   100,000,000	
   100,000,000	
   100,000,000	
   100,000,000	
  
>Avg Price per Room Growth Rate	
   2%	
   2%	
   2%	
   2%	
   2%	
  
Average Price per Room	
   140	
   143	
   146	
   149	
   152	
   155	
  
Room Revenue	
   35,000,000,000	
   35,700,000,000	
   36,414,000,000	
   37,142,280,000	
   37,885,125,600	
   38,642,828,112	
  
20
Data Sources
Data Compendia Consultancies
CIA World Factbook
https://www.cia.gov/library/
publications/the-world-factbook
Accenture http://www.accenture.com
NationMaster http://www.nationmaster.com Booz Allen http://www.boozallen.com
Wikipedia http://www.wikipedia.org Deloitte http://www.deloitte.com
Government Forrester http://www.forrester.com
Bureau of the Census http://www.census.gov IBM http://www.ibm.com
Data.gov http://www.data.gov McKinsey http://www.mckinsey.com
U.S. Energy Information
Administration
http://www.eia.gov PwC http://www.pwc.com
Business Universities
Barrons http://www.barrons.com Industry Groups
The Economist http://www.economist.com
And if all else fails…
Wall Street Journal http://www.wsj.com
21
22
Helpful Hints
§  USA-only estimates OK (unless the foreign market is critical to
success)
§  Make citations clear
§  Solid, well-reasoned market size estimate adds credibility to your
investor pitch
23
Next Steps
§  Financial projections
§  Estimate market share
§  Common fallacies:
•  “Our SAM is 50 gazillion dollars, so if we achieve on one hundredth of one
percent market share, we’re a billion dollar company.”
•  “We target a $5 million niche and expect to capture 75% of the market.”
§  Test against Business Model Canvas
•  Adjust market size assumptions
•  Re-visitValue Proposition, Customer Segments & Channels
24
Rules ofThumb
§  Market size projections are usually large numbers.
§  Shoot for 10-25% market share within 5 years.
§  The smallest business that might attract outside investors should
project $10 million in sales within 5 years (minimum $40 million
SAM).
25
Assignment
§  Research and estimate market size for your business. Estimate at least
one of TAM, SAM and Target Market.
§  Upload to http://nvc2013.istart.org by Feb 15:
•  Business Model Canvas
•  Business Model Environment
•  Market Size Estimate
26

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Market sizing TAM SAM SOM Target Market

  • 2. Seminar Schedule §  Business Models •  Canvas, 1/16/13 •  Environment, 1/22/13 §  Marketing •  Sizing a Market, 1/29/13 •  Product & Promotion, 2/5/13 •  Pricing & MarketValidation, 2/6/13 §  Operations, 2/12/13 §  Finance •  Basics, 2/19/13 •  Planning, 2/20/13 •  Measurement, 2/26/13 §  Teams, 2/27/13 §  Technology, 3/5/13 §  Law •  Intellectual Property, 3/12/13 •  Company Formation, 3/13/13 §  Investors •  Financial, 4/2/13 •  Strategic, 4/9/13 •  Presentation, 4/16/13 2
  • 3. Markets & Marketing Markets §  How big is the opportunity? Marketing §  Communicating yourValue Proposition §  3 P’s •  Product (or Pservice) •  Price •  Promotion 3
  • 4. This is your Business Model Canvas… 4
  • 5. …Business Model Canvases are CONNECTED 5
  • 6. A Market is the mechanism by which a business delivers its value proposition. 6 There are at least two roles in a market: Buyer Seller
  • 7. Most markets consist of chains of buyer and seller relationships. 7 Buyer Seller Buyer Seller Component Suppliers Contract Manufacturers Apple Mac Owner
  • 8. Market Size §  Quantifies the financial potential of your business. §  Helps you refine Business Model Canvas hypotheses: •  Very small market size may not be worth pursuing. •  May be difficult to gain traction in a gigantic market. §  Two measurements: •  Money (usually USD) •  Units §  People §  Consumption (e.g. washloads, room nights, kilowatt hours, etc.) 8
  • 9. Three Market Size Estimates §  Total Addressable Market (TAM): Value of all of the buyer/seller relationships participating in the market. §  Served Addressable Market (SAM):The part of the TAM for which your business model’s value proposition is strongest. §  Target Market: (Usually) demographic segment of the SAM with the most direct path to success. 9 SAM Target SAM TAM
  • 10. Total Addressable Market (TAM) §  Quantifies the entire chain of buyer/seller relationships in your market. §  Only need to estimate the value of the relationships at point of consumption (incorporates the value of all relationships in the chain) §  Usually very broad. §  Easiest to estimate. §  Examples: •  Mobile apps •  Energy consumption •  Health & fitness 10
  • 11. Served Addressable Market (SAM) §  A value proposition rarely applies to an entire TAM. §  Opportunity to sharpen your focus on a particular part of the market. §  If TAM and SAM aren’t that different, just estimate an addressable market. §  Examples: •  Mobile healthcare apps for seniors •  Self-generated renewable energy storage •  Health & fitness at work 11
  • 12. Target Market §  Process not that different than for SAM. §  One more level of refinement. §  Often a demographic target. §  Examples: •  Mobile healthcare apps for seniors, targeting retirement homes and large gerontology practices. •  Self-generated renewable energy storage, targeting the oilfield services, food manufacturing and automotive industries. •  Health & fitness at work, targeting new male employees aged 25-40 in companies with annual sales of $500M or more. 12
  • 13. TAM, SAM andTarget Markets? 13
  • 14. TAM, SAM andTarget Markets? 14
  • 15. TAM, SAM andTarget Markets? 15
  • 16. TAM, SAM andTarget Markets? 16
  • 17. Quantifying Market Size §  If you’re lucky: •  Find an industry or market study that fits your business model §  If you’re not: •  Build a market model §  Important to differentiate: •  Facts •  Assumptions •  Extrapolation Algorithms §  Run multiple scenarios §  Two time frames: •  Now •  In 5 years 17
  • 18. Example 18 §  The internet revolution changed the travel industry forever. But it didn’t change the whole travel industry. §  The travel industry’s meetings & events segment is hampered by inefficient business processes and ineffective pricing models that do not leverage modern technology, especially for hotel accommodations. §  GroupRes is Software as a Service (SaaS) that makes it easy for event guests to reserve a hotel room, while increasing profit for event planners and hotels.
  • 19. Example 19 $35 $26$6 $18 $28 Total  Addressable   Market  (TAM)  of   Accommodations   represent  the   largest  share  (31%)  of  T&E  Spending     for  U.S.  Meetings  ($113B  Total) Accommodations Food  &  Beverage Car  Rental Air  Travel Other $Billion Source:  PwC $29.7 $1.8 $3.5 Served  Addressable   Market  (SAM)  is   $5.3B,  or  15%  of  spending  on   commissions   and  fees.   Net  to  Hotel Technology  Fees Commissions
  • 20. Example Year 1   Year 2   Year 3   Year 4   Year 5   Year 6   Market   >Meeting Growth Rate   0%   0%   0%   0%   0%   Meetings   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   Room Nights/Meeting   139   139   139   139   139   139   Room Nights   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   Room Nights/Reservation   2.5   2.5   2.5   2.5   2.5   2.5   Reservations   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   >Avg Price per Room Growth Rate   2%   2%   2%   2%   2%   Average Price per Room   140   143   146   149   152   155   Room Revenue   35,000,000,000   35,700,000,000   36,414,000,000   37,142,280,000   37,885,125,600   38,642,828,112   20
  • 21. Data Sources Data Compendia Consultancies CIA World Factbook https://www.cia.gov/library/ publications/the-world-factbook Accenture http://www.accenture.com NationMaster http://www.nationmaster.com Booz Allen http://www.boozallen.com Wikipedia http://www.wikipedia.org Deloitte http://www.deloitte.com Government Forrester http://www.forrester.com Bureau of the Census http://www.census.gov IBM http://www.ibm.com Data.gov http://www.data.gov McKinsey http://www.mckinsey.com U.S. Energy Information Administration http://www.eia.gov PwC http://www.pwc.com Business Universities Barrons http://www.barrons.com Industry Groups The Economist http://www.economist.com And if all else fails… Wall Street Journal http://www.wsj.com 21
  • 22. 22
  • 23. Helpful Hints §  USA-only estimates OK (unless the foreign market is critical to success) §  Make citations clear §  Solid, well-reasoned market size estimate adds credibility to your investor pitch 23
  • 24. Next Steps §  Financial projections §  Estimate market share §  Common fallacies: •  “Our SAM is 50 gazillion dollars, so if we achieve on one hundredth of one percent market share, we’re a billion dollar company.” •  “We target a $5 million niche and expect to capture 75% of the market.” §  Test against Business Model Canvas •  Adjust market size assumptions •  Re-visitValue Proposition, Customer Segments & Channels 24
  • 25. Rules ofThumb §  Market size projections are usually large numbers. §  Shoot for 10-25% market share within 5 years. §  The smallest business that might attract outside investors should project $10 million in sales within 5 years (minimum $40 million SAM). 25
  • 26. Assignment §  Research and estimate market size for your business. Estimate at least one of TAM, SAM and Target Market. §  Upload to http://nvc2013.istart.org by Feb 15: •  Business Model Canvas •  Business Model Environment •  Market Size Estimate 26