You’re unlikely to build a big company in a small market. The solution may be great, but if there aren’t enough people with the problem, the company’s upside potential is limited. Today I read a blog post from Bling Capital that provides a simple framework for quickly sizing a market. Here are a few takeaways:
- Bottoms up – Don’t take a top-down approach that focuses on getting a percentage of a known market. That can severely underestimate a market. An NYU professor made this mistake when he claimed that Uber was overvalued. A bottoms-up approach that also considers new use cases enabled by a superior solution is better.
- Customer segmentation – All customers aren’t equal. Different customers will require different go-to-market strategies.
- Penetration rates – Be realistic about how much of the market you’ll capture. Fifty percent isn’t realistic for most companies, but 5% is. Penetration may vary by customer type (e.g. urban vs. rural).
- Gross profit – The cost of delivering a solution matters a lot. It’s an indication of whether the company can become profitable. Growing revenue or GMV quickly but with low gross profitability makes the path to turning a profit much harder.
Every market is different and founders should consider the nuances of their market when sizing it, but this framework is a good starting point.