A recent First Gear team began on a mission to satisfy the need of a very passionate clinician long before they applied to participate in this program offered by the Innovation Institute. In response to a recent session the team estimated the size of their product’s pie at $25,000 a year. Some venture capital firms won’t consider an investment in a company unless the market is at least $1 billion a year.
So let’s learn more about the important process of market sizing. How will you determine how big your opportunity is? If you’re in the process of commercialization or considering bringing your innovation to market, you need to be able to answer that important question. It's key to answer for yourself, investors, suppliers, and partners. Market sizing helps you assess and validate that your innovation is a fit for a market.
A market can consist of multiple key stakeholders, such as companies, buyers, users, and consumers. Start to define the market by determining the common problem they are striving to solve. Define who will use the innovation, who will influence the purchase decision and who will buy it. Lastly, define where and how often your innovation will be used (e.g., a one-time purchase or every time they make a cup of coffee).
After you characterize the attributes that define your market, you can then segment it in order to assess and quantify it. This process of market sizing involves three steps: Total Available Market (TAM), Served Available Market (SAM), and Target Market (TM). This allows you to judge the scope of your opportunity based on where your innovation fits in the market. You may have seen this market segmentation defined in different ways elsewhere, but the intent is always very similar – how big is the pie when it is most broadly defined and then narrowing in on what is the slice my innovation is best suited to start with and will have the biggest impact.
Total Available Market: how big the market is. How many potential customers?
- How many people could want/need the product (total possible demand)?
- How many "units" are required to supply that market?
- How large would the market be (in $) if everyone in the market purchased?
Served Available Market: how big your part of the market is. How many customers can you reach?
- How many people need/can use the product based on constraints such as supported operating systems for mobile apps or a medical procedure limited to only certain types of hospitals?
- How many people have the money to purchase it?
- How large would the market be (in $) if only these people purchased?
Target Market: how much of the market you can get. Who will be most likely buyers at the outset?
- Who can you sell to during your initial years in the market (1-3)?
- How many customers is that?
- How large would the market be (in $) if only these people purchased?
These narrowing definitions of the market can be hypothesized at first, but that won't give you specific or accurate results. The most specified target market is found by talking with potential customers, channel partners, and competitors. Market sizing is a crucial part of commercialization because it helps you focus and understand where your innovation stands in the market. Market sizing lets you answer the question for your innovation, "how big is the opportunity?"
Need help deciding how big your pie is, apply to the Spring 2016 First Gear cohort today, or check out other Innovation Institute programs.
Material from this blog is based on Steve Blank's "How to Build a Startup."