Having defined the market, the next step is to describe its value. Usually that means information about the number of customers and current revenues across the entire defined market.
A point to note early on is that a total potential cost saving is not a market size; the fact that a product could save British hospitals £2bn per year does not mean that there is a market of £2bn per year for that product, unless every hospital would be allowed to spend all of their share of that £2bn saving on the new product.
Where possible, some granularity in the market size is useful. If you are selling stethoscopes in the UK, you could breakdown the total number of doctors by private employment versus NHS, and within the NHS by hospital versus GP practice. This is not customer segmentation- that will come later- but rather an identification of the larger themes within the market.
It is important to differentiate the total market size from the addressable market size. The latter is the part of the market you can feasibly target and earn from. If your B2C website is in English, then including the French market in your numbers is less meaningful.
This can become more nuanced. Some buyers might only be able to purchase from companies with audited accounts for three years, or other requirements that a startup can’t meet. Their purchasing value should be removed from an addressable market size.
Even further (if you have this level of insight) is the contract duration of large buyers in B2B models. If you are selling to a large company that reviews its procurement every two years, and that point is 18 months from now, then you need to remove that company’s purchasing power from the next 18 months’ addressable market size.
This last point is especially relevant for early forecasts, especially year 1 trials. If you are planning a trial period with a large buyer, and forecasting that they will purchase 10,000 units in year 1 for that trial, you need to be certain that their internal procurement rules allow them to buy 10,000 units in a trial (or do the same by value where relevant).
Growth
Having given the size, you must next show the growth. That should be available for the last five or ten years, and there should be estimates for the next few years also. Remember your sources for this data before pitching, as you may be asked what you are basing the numbers on, and always add any sources to your data room.
Growth figures often state a percentage in CAGR. That means Compound Annual Growth Rate, and it is a per-year rate of growth- make sure to state whether your growth rates are absolute values for a period, or the CAGR during that period. What do the industry analysts believe is driving that growth rate?
If you are creating something new, or the data is not available in your sector, then you may need to use a bottom-up calculation to determine your market size. Start with the total number of potential customers (whether they are people, businesses, trusts, or anything else) and work out what, on average, they might be willing to spend each on a product.
Then determine the market share you think you can capture in year 1, year 2, and so on; here, market share can be number of people or percentage of the total number of potential customers. Present both, for a sanity check, and generally don’t assume more than a few percent per year.
As an example, Facebook acquired 2.3bn users between 2004 and 2018, out of a population of 7bn and an online population of 3.2bn. That’s 72% of the online population, or 5% growth in market share (here using total potential market) per year. If you are modelling 10-20% market share growth per year you are going to need some pretty powerful data to back it up.
Tying growth into addressable markets, it may be the case that over time your addressable market grows to include other sections of the market that were previously not addressable. You should make a distinction between:
- Organic market size growth (5% more is spent on stethoscopes each year)
- Market share growth within your addressable market (I will move from 10 to 12% share of my addressable market)
- Addressable market expansion (by translating my site into French, I will gain a new addressable market of however many people or pounds)