Market Size Estimation in Product Management - Detailed Study

To develop a product strategy, you will need to learn about the overall market, your competition and your user.

Here, let's start with looking at the bigger picture by understanding about market sizing.

Let’s take an example to understand market sizing. Do you know who the king of Instagram is? Well, it’s Ronaldo (the person who has the most followers) if you didn’t know it already.

Now assume you are a product manager at Instagram. How will you find the person with maximum followers? Of course, by checking the number of followers they have.

What if Instagram doesn't show the number of followers? In that case, you will have to estimate it yourself. How would you approach this then? 

One way could be to take an estimation of the Instagram users in the world, then estimate the number of football lovers among them, and then, based on that, estimate Ronaldo’s fans.

The above method could be a possible approach to achieve your desired results.

In order to understand the market size, you need to know three terms: 

1. Total available market (TAM): The overall population that presents a revenue opportunity for your product falls in this category.

2. Serviceable available market (SAM): The portion of the markets, geographies, and/or other segments of the TAM that can be reached by your company or product.

3. Target segment: Also known as the serviceable obtainable market (SOM), this category includes the realistic portion of the SAM that can be captured by your company or product.

You can determine the size of your market through two approaches:

1. Top-down approach: From the entire market, you can determine the number of customers and the level of consumption to arrive at the target market.

2. Bottom-up approach: You can estimate the potential sales for a single business in the market and arrive at the total sales figure from it:

   • The total sales figure that you arrive at with the bottom-up approach is the product of the number of potential customers in the market and the price of your product. Suppose you are the product manager of a B2B SaaS (Software as a service) product like Freshdesk. SaaS operates on a per-seat basis, which refers to the number of users who have access to the service. So, you would consider the number of seats rather than the number of customers. Suppose your software is priced at $20 per seat, and the number of potential seats in the market is 1,000; then the market size comes to $20,000. 

You need to understand the key parameters that determine your market size as this will enable you to target the segment most likely to respond to your product. 

Additional Reading

• Understanding Market Sizing - An initiative by A Junior VC to learn concepts in a comic book format
• Potential Market Share Sizing - Learn to calculate potential market share size for a new product or service

Now that you have learned about market sizing, you must be wondering about the other market factors that can have positive and negative impacts on a product. To understand this, let’s proceed to the next segment on market dynamics.

Market sizing is similar to this method. Knowing the size and potential of the market you cater to is a crucial part of identifying the factors that need to be addressed in the development process of your product.

Let’s deep dive into market sizing in the next video.