Market sizing—estimating the total opportunity in a market—informs strategic decisions from product development to investment. Done well, market sizing provides directional guidance for resource allocation. Done poorly, it creates false precision that misleads decision-making.
This guide provides a framework for practical market sizing that supports real strategic decisions.
Understanding Market Sizing
Why Market Size Matters
Strategic uses of market sizing:
Go/no-go decisions: Is the opportunity worth pursuing?
Resource allocation: How much to invest relative to opportunity.
Competitive positioning: Where to focus relative to market structure.
Investor communication: Articulating opportunity to stakeholders.
Performance benchmarking: Market share and penetration assessment.
Types of Market Estimates
Different measures for different purposes:
Total Addressable Market (TAM): Total demand if you had no constraints.
Serviceable Addressable Market (SAM): Market you can realistically serve.
Serviceable Obtainable Market (SOM): Market you can realistically capture.
Market Sizing Methodologies
Top-Down Approach
Starting from aggregate data:
Process:
- Start with total market data
- Apply relevant segmentation
- Narrow to target segment
- Apply filters for reach and relevance
Sources: Industry reports, government data, analyst estimates.
Advantages: Fast, uses available data, provides context.
Limitations: May miss nuances, relies on others' definitions.
Bottom-Up Approach
Building from unit economics:
Process:
- Define unit of purchase
- Estimate number of potential buyers
- Estimate purchase frequency
- Calculate total market value
Sources: Primary research, customer data, operational metrics.
Advantages: More accurate, reveals assumptions, builds understanding.
Limitations: Data-intensive, may be harder to validate.
Triangulation
Combining approaches for confidence:
Multiple methods: Use both top-down and bottom-up.
Compare results: Understand discrepancies.
Reconcile differences: Identify which assumptions drive divergence.
Build confidence: Converging estimates increase reliability.
Practical Implementation
Defining the Market
Clear definition is essential:
Product/service scope: What are you sizing?
Geographic scope: Which markets?
Customer scope: Which segments?
Time frame: Current or projected?
Data Sources
Where to find information:
Secondary sources:
- Industry analyst reports (Gartner, Forrester, IBISWorld)
- Government statistics (Census, BLS, industry agencies)
- Trade association data
- Public company filings
Primary research:
- Customer surveys
- Expert interviews
- Observational studies
- Transaction data analysis
Handling Uncertainty
Market estimates are inherently uncertain:
Range estimates: Provide low/base/high scenarios.
Sensitivity analysis: Which assumptions matter most?
Explicit assumptions: Document what you're assuming.
Update regularly: Markets change; estimates should too.
Common Pitfalls
Overestimation Traps
Ignoring constraints: Assuming you can reach everyone.
Ignoring competition: Assuming you can capture the whole market.
Wishful thinking: Wanting the market to be bigger.
Wrong metrics: Sizing revenue when unit sales matter (or vice versa).
Precision Illusion
False confidence: Precise numbers from imprecise data.
Decimal places: More precision than the data supports.
Ignoring uncertainty: Not acknowledging estimation range.
Key Takeaways
-
Define clearly before sizing: Scope determines the result.
-
Use multiple approaches: Triangulation increases confidence.
-
Document assumptions: Make the basis explicit.
-
Embrace uncertainty: Ranges are more honest than point estimates.
-
TAM to SOM: Move from total to obtainable for actionable insight.
Frequently Asked Questions
How accurate should market sizing be? Depends on decision. Order of magnitude may suffice for go/no-go; more precision needed for detailed planning.
Which approach should we use—top-down or bottom-up? Both. Triangulation from multiple methods increases confidence.
How do we size new markets without data? Analog markets, first principles analysis, primary research. More uncertainty is inherent; acknowledge it.
How often should we update market estimates? At least annually for dynamic markets. More frequently if conditions change.
Should we buy market research or do it ourselves? Both have value. Purchased research provides breadth; custom research provides depth and specificity.
How do we present uncertain estimates to stakeholders? Ranges with scenarios, explicit assumptions, sensitivity to key variables. Avoid false precision.