2/2/2017 The Entrepreneur’s Guide To Estimating Market Size For It’s Startup

The Entrepreneur’s Guide To Estimating Market

Size For It’s Startup

Note: Before I begin, I would like to clarify the di埈�erence between market potential
and revenue estimate. I have often seen entrepreneurs use the two terms
interchangeably.

Market Potential

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Market Potential is about estimating the size of the overall market opportunity. It
is a sum total of the potential revenues of all players who are addressing that
opportunity, if all the potential customers were to buy. I.e. If you were selling
‘a埈�ordable’ golf kits for 埸�rst-time golfers, then you could estimate market
potential as follows (all numbers are indicative for illustration and do not
represent actual market) :

There are about 20 millon golfers across the top 10 gol埸�ng markets in the world.
Additionally, about 100,000 new people take up golf every year across the top 10
gol埸�ng markets in the world.
About 25% of these 埸�nd the cost of golf kits expensive. If you take this as the
addressable market at USD 400 a kit for 5 million buyers, we are addressing a
USD 2 bn market opportunity, even if you look at only those who 埸�nd the price
of current golf kits too high.
Additionally, the ‘high-quality at lower price’ value proposition is likely to
attract regular and casual golfers too i.e. 20 million golfers. This opens up a USD
8 billion market among existing golfers. And that’s a market growing at 15% pa.
However, given that most people who want to play golf do not take it up because
the current kits cost upwards of USD 1500, we believe that a USD 400 kit will
explode the market and we would be able to encourage 10 times the number of
people to start playing golf. I.e. by rede埸�ning the price-point, we can create an
additional market potential worth over USD 500 mn.
i.e. with an ‘a埈�ordable and high-quality golf kit’, we will be playing into a
market that’s roughly USD 8 – 10 billion in the top 10 gol埸�ng markets of the
world.

Revenue Estimate

Revenue estimate is about how much of this market potential do you plan to target.
Here’s how you could think about it:

We intend to launch this product in Japan, the world’s largest and fastest-
growing gol埸�ng market. There are 3 million active golfers in Japan and over
50,000 new golfers are added every year.

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We believe that with an a埈�ordable golf kit, we could double the size of the golf
market in Japan.
In year one, we intend to attract 5000 customers, going to 20,000 customers in
year 2 and selling to 100,000 new and existing golfers in year 3. These will be in
the top 5 gol埸�ng markets in Japan. In year 4, we intend to take the concept to US
and Europe, with a target to sell over 500,000 kits in year 4, across all markets
we are present in.
Thus, our revenue estimate (at current prices) is USD 2 mn in year 1, USD 8 mn
in year 2, USD 40 mn in year 3 and USD 200mn in year 4. (In comparison, the
leading golf kits brand is doing USD 2 bn in revenues currently)

Estimating the size of the market, and then predicting how much revenue the
startup can achieve and at what growth rate is indeed a tricky exercise. But going
wrong on this could either kill your company, or if in a rare case you have
underestimated your revenues, you may end up raising more capital than
necessary and thus diluting more equity at an early stage of the venture.

It is therefore very, very critical that entrepreneurs focus on working and

reworking on the market size and revenue potential based on sound assumptions
and with minute detailing.

Many startups make the mistake of taking broad brush reports from large
consulting or research 埸�rms, and estimate the size of their market on the basis of
those reports. Often we hear entrepreneurs mention “According to Gartner,
healthcare is a $80Bn industry with a 23% growth rate”. Now, while this could be
broadly true, for an investor, and even for the startup, these 埸�gures have little
relevance. Here’s why…

In most market segments, the investors would be broadly aware of the scale
potential. At a startup stage, investors will most likely invite a startup for a
meeting only after they have assessed that the concept does address a large
market. Hence, stating the obvious, especially in segments that are very obviously
large does not add any value. E.g. For a startup in the education sector,
highlighting in minute details the number of schools, number of students and

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growth rate in India is wasting precious time in the 埸�rst meeting with investors.
Assume that investors who are meeting a startup in the education space know the
potential of the opportunities in the domain.

Investors don’t get any comfort from market estimated from industry research
data. They want entrepreneurs to build up their estimates based on their insights
and conviction – on how their concept will alter the dynamics of the market they
wish to operate in.

How then do you estimate the market potential?  Simply by being speci埸�c about
your segment and making some assumptions on the speci埸�c segments and the
revenues per customer/consumer. E.g. If your concept is about premium home
tuition, instead of saying education in India is a $18 Bn market, it will be prudent
to state “With over 250,000 students in the top 10 cities in schools with fees above
INR 10,000 a month, at INR 2500 per student, the market potential is roughly over
INR.500 – INR.600Cr per annum. At an all-India level, the same translates to a
market potential of well over INR.1000 Cr.”

Some Points To Consider When Estimating Market Potential

Clearly de埸�ne what problem you are solving… and for whom – this will give you
a good idea of the number of customers with that problem in the geographies
that you plan to be available in.
Estimate the practical reach e.g. while there may be a 100,000 people in your
target audience spread across 50 cities, you may want to take the top 5 or top 10
cities and see how many people you have within your target audience. This of
course gives you the total market potential, if 100% of potential customers were
to buy.
Now, apply some 埸�lters i.e. ability to pay, ability to reach via media, etc. E.g.
while there may be 60,000 potential customers in the top 10 cities you
identi埸�ed, and you may be planning to use a combination of media, if the total
reach of these media vehicles is 50%, the total potential of the market is really
30,000 customers.

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You could also apply some price 埸�lters to test the elasticity of the demand in
comparison to price. I.e. work up alternate scenarios to re執�ect the increase /
decrease in demand in case the price were to be moved up or down; and then
evaluate which scenario makes a better business case. [Note: For di埈�erent
situations you may have very di埈�erent parameters for a good business case. In
some cases, rapidly acquiring customers, even if margins are lower, would be a key
criteria (often relevant in categories; it is important to achieve scale to be relevant
– e.g. e-commerce – lock in potential customers on whom pro埸�tability can be
increased later)].

Now, if the product is of a repeat purchase nature, you would need to make some
assumptions on the number of times the customers would buy the product /
service in a year. In doing this, it is critical to map the reality or in case of new
product categories, to do some qualitative and/or qualitative research to validate
your assumptions on the number of repeat purchases within a year.

All the above will need to be worked and reworked at di埈�erent levels of
assumptions often to arrive at what seems like a practical market estimation.

This article was originally published in Inc42.

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Market sizing and estimating revenue and growth

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In your pitch deck do you talk about future markets that can be addressed by the product?

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Author: Prajakt Raut

Prajakt Raut is the founder of Applyi埸�.com, and author of the book for startups - ‘Starting
Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people
to become entrepreneurs. _____________ Prajakt is the founder of Applyi埸� - an
online platform that provides startups a 36-point scorecard and assessment report on the
venture's investment readiness [www.applyi埸�.com], and helps them improve their odds of
getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where
growth-stage companies get sharp, incisive advice from senior professionals and
experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyi埸�, Prajakt was
the head of operations at IAN, founding member of a leading incubator, and the Asia-
Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a
healthcare services company, and was part of the founding team member of Idealake
Technologies. While in college Prajakt had founded a printing business and has spent over
10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund
Raising’, helps startups understand an investor’s perspective, and helps them improve
their odds of getting funded. The book also helps entrepreneurs understand the
building blocks of a business. View all posts by Prajakt Raut

/ June 8, 2015 / market size, market sizing, prajakt raut, startups

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