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Market Size in a Business Plan

… the market size looks like this …

What is Market Size?

To the investor, the solution in itself has no value unless it can be realized in the market place. Ultimately, it will be the industry market size that decides the value of your business to an investor and, as a rule of thumb, the bigger the available market, the better.

How to Calculate Market Sizes

TAM (Total Available Market) is the total market size (people, revenues, units etc.) who have the problem you are seeking to solve today.

SAM (Served Available Market) is the part of the TAM who are able to use your solution to the problem. This is your target market .

Available Market Size Estimation

The total available market or TAM is based on the number of properties in the region which use lawn care treatments. Using a top down approach, Government statistics might show that there are six million properties with gardens and industry analysis reveals that 3% of properties use lawn care treatments, and spend an average of 150 per year. The TAM is calculated as follows:

TAM = 6 million x 3% x 150 = 27 million per year

This means that if your business operated throughout the entire region with no competition its revenues would be 27 million per year. TAM defines the maximum size for the market the business operates in.

However, at the moment not all of the TAM are able to use your lawn care service as you only have one lawn care outlet in one town in the region. The market which is able to use your solution is limited to the town, so the serviceable available market or SAM is based on the number of properties with gardens within the town. Again, Government statistics might show that there are one million properties with gardens in the region, so the SAM is given as follows:

SAM = 1 million x 3% x 150 = 4.5 million (16.7% of TAM)

If there was no competition within the town and you had the resources to provide the service , then the revenue from the business would be 4.5 million per year. The SAM represents 16.7% of the TAM.

Market Size and Growth

The investor will also want to know whether this is a growing or declining market. The market size section of the business plan should also give an indication of the potential for growth over the next five years. We might be able to find additional market size data which shows that the number of properties with gardens will grow to 20.5 million, and the number using lawn care treatments is expected to increase to 4%, with an average spend of 165. the TAM is calculated as follows:

TAM = 6.5 million x 4% x 165 = 42.9 million per year in five years time

Like wise for the town the number of properties with gardens might be expected to increase to 1.15 million, and the SAM is given as follows:

SAM = 1.15 million x 4% x 165 = 7.59 million (17.7% of TAM)

Market Estimate Presentation in the Business Plan

The business plan market size section can be presented in a number of formats, but a simple column format setting out the TAM and SAM now and in five years time, will allow the investor to quickly ascertain how big the market for the product could be and it prospects for growth over the duration of the business plan.

Market sizing is an important part of the business plan process. But this is planning not accounting. The market size section is an educated guess at how big the available market for the product is and aims to show that a successful launch and continued growth for the product is possible. It is based on available statistics and trade association data.

A few key points should be remembered when trying to determine market size

• Start from verifiable and accurate base data. In the above example, the starting point was a government statistic based on the number of properties with gardens.
• Double check any information with an alternative source if possible.
• Check the results make sense.
• Check the results using a bottom up calculation. For example, if you know a lawn care business in the region has revenue of 500,000 and estimated 2% of the market, then the TAM should be in the order of 500,000 / 2% = 25 million compared to the 27 million calculated above.
• Keep the industry definition narrow, in this case lawn care treatments.
• Be specific, don’t try and say for example, there are millions of properties in the world with gardens and if we can take a very small percentage of that our plan will work.
• The analysis will differ depending on whether you are dealing with an existing market or a completely new market. For an existing product there will be market and industry data available, for a new product you may need to carry out market size research with potential customers and work upwards from there.

This is part of the financial projections and Contents of a Business Plan Guide , a series of posts on what each section of a simple business plan should include. The next post in this series is about the analysis of the target market for the business plan product.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Market Size: The Two Best Methods for Market Sizing Your Business, Plus Expert Tips

Published: September 20, 2024

When considering a new venture, you must understand: “What is market size?” More specifically, you need to know your venture’s potential market size. But “Why?” I hear you ask.

Picture this: You’ve put in months of hard work only to realize that 100 people in the U.S. will potentially buy your product.

The potential revenue from that population size may be worth your product's manufacturing, production, and distribution costs — or it may not.

But even if you’ve got 10,000 potential customers, you still need to go deeper in your market sizing to understand whether there’s a viable market.

Below, I’ll share methods to calculate your market size and accurately measure your business’ revenue potential.

I will also share first-hand experiences from founders, CEOs, entrepreneurs, and more who spoke to me about their market sizing journeys.

Keep reading, or jump to the section you’re looking for:

What is market sizing?

Why is market size important, market size vs. market value, market sizing terms to know, how to calculate market size, market sizing methods, market size: faqs.

Market sizing is the process of finding how big your product's audience or revenue could be. So, market size is the total number of potential buyers for a product or service and the potential revenue reach based on that population size.

When market sizing, you're calculating customer numbers to measure the growth potential of your business.

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There are several reasons why every business should spend time sizing its market:

• Market sizing helps you determine whether your product is a worthy investment. The latest data from the U.S. Bureau of Labor Statistics (BLS) finds that 23.2% of private sector businesses in the U.S. fail within the first year. Businesses fail for many reasons — however, miscalculating product demand (or not calculating it at all) is one of them.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners and investors.

Real-world example:

“We first identified who fits into our target market so we could figure out an ideal market size,” says Michael Nemeroff , CEO and co-founder of apparel eCommerce brand Rush Order Tees .

Nemeroff says the brand considered business leaders, schools, sports teams, and event organizers their primary targets because they create customized apparel and other products. Because the team operates virtually, that market can extend as far as shipping is availability.

“The biggest challenge was accounting for differences across regions because of population density, event frequency, business hubs, etc.,” Nemeroff adds: “It’s a bit of a guessing game, but you’re making educated guesses that help you understand the viability of your idea and start planning your budget.”

According to Nemeroff, “it would be terrible to overshoot your market size considerably then overspend on a market where the juice isn’t worth the squeeze.”

• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and its needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set realistic goals, assign resources, and refine your strategies.

“Skipping market sizing can lead to costly mistakes,” says Logan Mallory , vice president of marketing at Motivosity , an employee recognition and rewards platform.

“Early in my career, I was a part of a startup that did not prioritize market sizing. We anticipated that our product would appeal to a large number of people, so we spread our marketing efforts excessively thin.”

Mallory continues, “As a result, we wasted resources on low-conversion areas while passing up more lucrative prospects. If we had done comprehensive market sizing, we could have identified and targeted high-potential sectors from the outset, maximizing our budget and generating faster growth . ”

• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to a company or industry's financial worth or estimated market capitalization. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Before figuring out your market size, there are a few helpful terms you should get to know.

Total Addressable Market (TAM)

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base a company could achieve if it captures 100% of its market share.

Serviceable Addressable Market (SAM)

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company's resources, capabilities, and target customers.

Serviceable Obtainable Market (SOM)

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

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How to Write a Market Analysis for a Business Plan

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A lot of preparation goes into starting a business before you can open your doors to the public or launch your online store. One of your first steps should be to write a business plan . A business plan will serve as your roadmap when building your business.

Within your business plan, there’s an important section you should pay careful attention to: your market analysis. Your market analysis helps you understand your target market and how you can thrive within it.

Simply put, your market analysis shows that you’ve done your research. It also contributes to your marketing strategy by defining your target customer and researching their buying habits. Overall, a market analysis will yield invaluable data if you have limited knowledge about your market, the market has fierce competition, and if you require a business loan. In this guide, we'll explore how to conduct your own market analysis.

How to conduct a market analysis: A step-by-step guide

In your market analysis, you can expect to cover the following:

Industry outlook

Target market

Market value

Competition

Barriers to entry

Let’s dive into an in-depth look into each section:

Step 1: Define your objective

Before you begin your market analysis, it’s important to define your objective for writing a market analysis. Are you writing it for internal purposes or for external purposes?

If you were doing a market analysis for internal purposes, you might be brainstorming new products to launch or adjusting your marketing tactics. An example of an external purpose might be that you need a market analysis to get approved for a business loan .

The comprehensiveness of your market analysis will depend on your objective. If you’re preparing for a new product launch, you might focus more heavily on researching the competition. A market analysis for a loan approval would require heavy data and research into market size and growth, share potential, and pricing.

Step 2: Provide an industry outlook

An industry outlook is a general direction of where your industry is heading. Lenders want to know whether you’re targeting a growing industry or declining industry. For example, if you’re looking to sell VCRs in 2020, it’s unlikely that your business will succeed.

Starting your market analysis with an industry outlook offers a preliminary view of the market and what to expect in your market analysis. When writing this section, you'll want to include:

Market size

Are you chasing big markets or are you targeting very niche markets? If you’re targeting a niche market, are there enough customers to support your business and buy your product?

Product life cycle

If you develop a product, what will its life cycle look like? Lenders want an overview of how your product will come into fruition after it’s developed and launched. In this section, you can discuss your product’s:

Research and development

Projected growth

How do you see your company performing over time? Calculating your year-over-year growth will help you and lenders see how your business has grown thus far. Calculating your projected growth shows how your business will fare in future projected market conditions.

Step 3: Determine your target market

This section of your market analysis is dedicated to your potential customer. Who is your ideal target customer? How can you cater your product to serve them specifically?

Don’t make the mistake of wanting to sell your product to everybody. Your target customer should be specific. For example, if you’re selling mittens, you wouldn’t want to market to warmer climates like Hawaii. You should target customers who live in colder regions. The more nuanced your target market is, the more information you’ll have to inform your business and marketing strategy.

With that in mind, your target market section should include the following points:

Demographics

This is where you leave nothing to mystery about your ideal customer. You want to know every aspect of your customer so you can best serve them. Dedicate time to researching the following demographics:

Income level

Create a customer persona

Creating a customer persona can help you better understand your customer. It can be easier to market to a person than data on paper. You can give this persona a name, background, and job. Mold this persona into your target customer.

What are your customer’s pain points? How do these pain points influence how they buy products? What matters most to them? Why do they choose one brand over another?

Research and supporting material

Information without data are just claims. To add credibility to your market analysis, you need to include data. Some methods for collecting data include:

Target group surveys

Focus groups

Reading reviews

Feedback surveys

You can also consult resources online. For example, the U.S. Census Bureau can help you find demographics in calculating your market share. The U.S. Department of Commerce and the U.S. Small Business Administration also offer general data that can help you research your target industry.

Step 4: Calculate market value

You can use either top-down analysis or bottom-up analysis to calculate an estimate of your market value.

A top-down analysis tends to be the easier option of the two. It requires for you to calculate the entire market and then estimate how much of a share you expect your business to get. For example, let’s assume your target market consists of 100,000 people. If you’re optimistic and manage to get 1% of that market, you can expect to make 1,000 sales.

A bottom-up analysis is more data-driven and requires more research. You calculate the individual factors of your business and then estimate how high you can scale them to arrive at a projected market share. Some factors to consider when doing a bottom-up analysis include:

Where products are sold

Who your competition is

The price per unit

How many consumers you expect to reach

The average amount a customer would buy over time

While a bottom-up analysis requires more data than a top-down analysis, you can usually arrive at a more accurate calculation.

Step 5: Get to know your competition

Before you start a business, you need to research the level of competition within your market. Are there certain companies getting the lion’s share of the market? How can you position yourself to stand out from the competition?

There are two types of competitors that you should be aware of: direct competitors and indirect competitors.

Direct competitors are other businesses who sell the same product as you. If you and the company across town both sell apples, you are direct competitors.

An indirect competitor sells a different but similar product to yours. If that company across town sells oranges instead, they are an indirect competitor. Apples and oranges are different but they still target a similar market: people who eat fruits.

Also, here are some questions you want to answer when writing this section of your market analysis:

What are your competitor’s strengths?

What are your competitor’s weaknesses?

How can you cover your competitor’s weaknesses in your own business?

How can you solve the same problems better or differently than your competitors?

How can you leverage technology to better serve your customers?

How big of a threat are your competitors if you open your business?

Step 6: Identify your barriers

Writing a market analysis can help you identify some glaring barriers to starting your business. Researching these barriers will help you avoid any costly legal or business mistakes down the line. Some entry barriers to address in your marketing analysis include:

Technology: How rapid is technology advancing and can it render your product obsolete within the next five years?

Branding: You need to establish your brand identity to stand out in a saturated market.

Cost of entry: Startup costs, like renting a space and hiring employees, are expensive. Also, specialty equipment often comes with hefty price tags. (Consider researching equipment financing to help finance these purchases.)

Location: You need to secure a prime location if you’re opening a physical store.

Competition: A market with fierce competition can be a steep uphill battle (like attempting to go toe-to-toe with Apple or Amazon).

Step 7: Know the regulations

When starting a business, it’s your responsibility to research governmental and state business regulations within your market. Some regulations to keep in mind include (but aren’t limited to):

Employment and labor laws

Advertising

Environmental regulations

If you’re a newer entrepreneur and this is your first business, this part can be daunting so you might want to consult with a business attorney. A legal professional will help you identify the legal requirements specific to your business. You can also check online legal help sites like LegalZoom or Rocket Lawyer.

Tips when writing your market analysis

We wouldn’t be surprised if you feel overwhelmed by the sheer volume of information needed in a market analysis. Keep in mind, though, this research is key to launching a successful business. You don’t want to cut corners, but here are a few tips to help you out when writing your market analysis:

Use visual aids

Nobody likes 30 pages of nothing but text. Using visual aids can break up those text blocks, making your market analysis more visually appealing. When discussing statistics and metrics, charts and graphs will help you better communicate your data.

Include a summary

If you’ve ever read an article from an academic journal, you’ll notice that writers include an abstract that offers the reader a preview.

Use this same tactic when writing your market analysis. It will prime the reader of your market highlights before they dive into the hard data.

Get to the point

It’s better to keep your market analysis concise than to stuff it with fluff and repetition. You’ll want to present your data, analyze it, and then tie it back into how your business can thrive within your target market.

Revisit your market analysis regularly

Markets are always changing and it's important that your business changes with your target market. Revisiting your market analysis ensures that your business operations align with changing market conditions. The best businesses are the ones that can adapt.

Why should you write a market analysis?

Your market analysis helps you look at factors within your market to determine if it’s a good fit for your business model. A market analysis will help you:

1. Learn how to analyze the market need

Markets are always shifting and it’s a good idea to identify current and projected market conditions. These trends will help you understand the size of your market and whether there are paying customers waiting for you. Doing a market analysis helps you confirm that your target market is a lucrative market.

2. Learn about your customers

The best way to serve your customer is to understand them. A market analysis will examine your customer’s buying habits, pain points, and desires. This information will aid you in developing a business that addresses those points.

3. Get approved for a business loan

Starting a business, especially if it’s your first one, requires startup funding. A good first step is to apply for a business loan with your bank or other financial institution.

A thorough market analysis shows that you’re professional, prepared, and worth the investment from lenders. This preparation inspires confidence within the lender that you can build a business and repay the loan.

4. Beat the competition

Your research will offer valuable insight and certain advantages that the competition might not have. For example, thoroughly understanding your customer’s pain points and desires will help you develop a superior product or service than your competitors. If your business is already up and running, an updated market analysis can upgrade your marketing strategy or help you launch a new product.

Final thoughts

There is a saying that the first step to cutting down a tree is to sharpen an axe. In other words, preparation is the key to success. In business, preparation increases the chances that your business will succeed, even in a competitive market.

The market analysis section of your business plan separates the entrepreneurs who have done their homework from those who haven’t. Now that you’ve learned how to write a market analysis, it’s time for you to sharpen your axe and grow a successful business. And keep in mind, if you need help crafting your business plan, you can always turn to business plan software or a free template to help you stay organized.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

On a similar note...

The Leading Source of Insights On Business Model Strategy & Tech Business Models

What Is Market Sizing And Why It Matters In Business

Market sizing is the estimation of the potential of a market. Incorporating market research, market sizing is useful for businesses looking to introduce a new product or service to evaluate the business opportunity. Market sizing also helps investors to understand the value of the potential opportunity within the target company’s business plan.

Table of Contents

Understanding market sizing

For businesses wishing to enter a new market, the research that goes into market analysis is daunting in its complexity. 

Market sizing seeks to remove that complexity by breaking the analysis into smaller sets of assumptions.

These assumptions can then be extrapolated to form an overall market size estimate.

Once a business has successfully undertaken market sizing, it can determine the level of investment required and also potential growth strategies.

It can also gauge the value of a market and its profitability – factors that ultimately determine whether the business enters said market.

The three basic steps to market sizing

To be effective, market sizing should be a bottom-up approach. Although time-consuming, this approach to market research gives more realistic and accurate market potential.

Using the bottom-up approach, market size can be calculated by multiplying the number of units sold by the price of each unit. 

In other words, businesses using this approach start with the smallest known pieces of data and then use these data to build up a realistic representation of their market.

This approach differs from the top-down approach, which is based on generalized and trend-inflated market valuation whose data accuracy is often questionable.

Here is how the bottom-up approach works.

1. Define the target market

The first step is perhaps the most important, and it involves understanding a target audience. In other words, who is the type of person a product or service is best suited to?

A buyer persona can help because it allows businesses to be ultra-specific on the type of people they want to attract. 

Then, the business must determine the size of their target market . This can be done in several ways and may involve contacting business organizations or governmental and commerce agencies.

For example, a high-end baby food company may contact its local commerce board to determine that there are 550 high-end supermarkets in their state.

2. Assess product interest

Then, the business should determine the number of consumers who may be interested in buying their product.

This can be done by looking at competitors and their annual sales data.

However, sometimes this information is hard to obtain. If competitor data cannot be found, then focus groups and surveys can be used to gauge the likely level of interest in a new product.

While the baby-food company may have identified 550 stores, they find that only 250 are interested in stocking the product on their shelves.

3. Calculate the potential sales

Calculating potential sales can be tricky, but an accurate approximation can be obtained by competitor analysis or by referring to cash flow forecasting or other finance based models.

In the case of the baby-food company, it estimates a roll-out cost of $20 million across 250 stores compared to potential annual revenue of $60 million.

Although the investment is 33% of forecasted annual revenue, profits in the second year sans roll-out costs are significantly higher. Therefore, the company decides to enter the market.

Market sizing example

Now that we’ve provided an overview of market sizing and how it works, let’s take a look at the hypothetical example of a LED manufacturer.

The manufacturer wants to know the size of the residential LED market size in the United States. 

Step 1 – Defining the target market

In first defining a target market , the manufacturer may find there are several audiences worth quantifying. These include:

• Environmentally-conscious consumers who want to switch out their incandescent bulbs for LEDs.
• First-home owners who want to incorporate LED lighting as part of a new build.
• Existing homeowners who want to upgrade or improve the lighting in older homes that are dimly lit.
• Homeowners living in states where incandescent bulbs have been banned by authorities.

The company can then perform detailed research and determine how many LED units are sold in each market and add them together to determine the total market size.

Alternatively and upon further research, it is found that the  total US LED market was valued at $9.89 billion in 2020  and is expected to be worth $17.22 billion by 2028.

However, these data account for LED sales across the residential, commercial, industrial, retail, hospitality, and healthcare sectors. 

Step 2 – Assess product interest

To determine what percentage of total LED sales are residential, the company learns that  47% of all United States households use LEDs for all or most of their lighting . 

If there are approximately  142.2 million houses in the United States , this equates to around 66.8 million potential customers.

Step 3 – Calculate the potential sales

As we noted earlier, calculating the potential sales for any product or service can be one of the most difficult parts of market sizing.

Below we have listed some assumptions for both existing and new homes in the United States.

Existing homes

• Approximately 66.8 million homes use LED illumination.
• The average US home has seven rooms with three LED units in each. Hence, the total number of LED units in all American homes is approximately 66.8 million x 7 x 3 = 1.4028 billion units.
• Considering the  average LED unit lasts 14 years , we can assume that 1.4028 billion units are purchased/replaced every 14 years. As a result, the company calculates that around 100 million units are purchased every year in existing homes.
• According to the US Census Bureau,  912,000 family homes were built in 2021 .
• For the sake of this article, let’s assume that every one of these new builds incorporates LED units with none using incandescent bulbs. Let’s also assume that these homes have an average of 7 rooms and 4 LED units in each. 
• The market size for LED units in new homes in the United States is therefore 912,000 x 7 x 4 = 25.536 million.

The company then adds the number of LED units sold in existing homes and new homes on an annual basis and arrives at a number of 125.53 million. 

If we assume that the average cost of an LED unit (including standard bulbs and more expensive downlights) is $15, the residential market for LED lighting as it stands today is worth around $1.88 billion annually.

Key takeaways:

• Market sizing is the estimate of the size of a market using insights gleaned from a target audience and existing or potential sales volume.
• Market sizing is a bottom-up approach that utilizes known data to give a representative view of the larger market. It is more accurate than the top-down approach that relies on generalized or assumption based market data from competitors.
• At its core, market sizing is an iterative process that is based on an accurate and detailed view of the target audience a business hopes to serve.

Key Highlights:

• Definition of Market Sizing: Market sizing is the process of estimating the potential size of a market for a specific product or service. It involves breaking down market analysis into smaller assumptions to arrive at an overall estimate of the market’s potential.
• Helps businesses assess business opportunities for introducing new products or services.
• Assists investors in understanding the value of potential opportunities in a company’s business plan.
• Define Target Market: Understand the target audience and determine the size of the market segment. Utilize buyer personas to be specific about the intended customers.
• Assess Product Interest: Determine the number of potential consumers interested in buying the product. Look at competitor data or conduct focus groups and surveys.
• Calculate Potential Sales: Calculate potential sales by multiplying the number of units sold by the price of each unit.
• Bottom-Up Approach: Market sizing should be a bottom-up approach, starting with known data and building up a realistic view of the market. This approach is more accurate than the top-down approach that relies on generalized data.
• Defining Target Market: Define different segments interested in LED lighting, such as environmentally-conscious consumers, first-home owners, existing homeowners, and those living in areas where incandescent bulbs are banned.
• Assessing Product Interest: Determine the percentage of households using LEDs and apply it to the total number of households in the target area.
• Calculating Potential Sales: Calculate potential sales for existing and new homes separately, considering the number of LED units per home, lifespan of LEDs, and market size for each segment.
• Market sizing assists businesses in understanding the potential of a market before entering with a new product or service.
• The process involves defining the target market , assessing product interest, and calculating potential sales.
• A bottom-up approach based on detailed data is more accurate than a top-down approach based on generalized market data.
• Market sizing is an iterative process that requires a detailed understanding of the target audience and potential sales volume.

Case Studies

Related Market Development Frameworks

TAM, SAM, and SOM

Niche Targeting

Market Validation

Market Orientation

Market-Expansion Strategy

Stages of Digital Transformation

Platform Business Model Strategy

Business Platform Theory

Business Scaling

Strategy Lever Framework

Connected Analysis Frameworks

Failure Mode And Effects Analysis

Agile Business Analysis

Business Valuation

Paired Comparison Analysis

Monte Carlo Analysis

Cost-Benefit Analysis

CATWOE Analysis

VTDF Framework

Pareto Analysis

Comparable Analysis

SWOT Analysis

PESTEL Analysis

Business Analysis

Financial Structure

Financial Modeling

Value Investing

Buffet Indicator

Financial Analysis

Post-Mortem Analysis

Retrospective Analysis

Root Cause Analysis

Blindspot Analysis

Break-even Analysis

Decision Analysis

DESTEP Analysis

STEEP Analysis

STEEPLE Analysis

Activity-Based Management

PMESII-PT Analysis

SPACE Analysis

Lotus Diagram

Functional Decomposition

Multi-Criteria Analysis

Stakeholder Analysis

Strategic Analysis

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Market Size for a Business Plan – 2 Methods to Gauge It

In order to estimate how much in sales your startup can hope for, you’re going to have to estimate the market size for your product/service(s). This is critical for your startup because it will give you an idea of your business’ potential. It will also help you plan for capacity-related issues.

2 approaches to estimating the market size for a business plan

I cover this topic more in-depth in a post on market size and growth rate on my sister site, InvestSomeMoney.com.

The context there is focused on investing your money in a publicly-traded company. Though that’s a little different than what we are doing here, the fundamental principles remain the same.

The goal is to determine how many potential customers there are for a business and how much they are willing to spend. In order to do that, we can employ two general methods. These methods are a top-down analysis and a bottom-up approach to understand market size and growth.

One way to think about this is that a bottom-up approach uses multiplication and a top-down analysis uses division to arrive at an estimated market size.

After writing on this subject several times, I’ve come up with another way to think about these methods. I think a bottom-up approach should look internally, at things like unit size and capacity. A top-down analysis should look externally at things like demographics and market research.

Looking at this from these two different perspectives opens the door for further analysis. When you’re done, you should know whether you can expect to be capacity constrained or demand constrained. You’ll also start to flesh out some ideas that will help you further into your business plan.

If you do an analysis with both approaches, you can compare the results. For instance, if your bottom-up approach is higher, you’ll know that you could have excess capacity issues. You need to consider scaling that back or otherwise expanding your product/service offering to drum up additional demand.

Conversely, if your top-down analysis reveals that demand is in excess of capacity, then you are leaving money on the table. Time to start thinking about what you can do to scale up and capture as much of the market as possible.

Let’s start by taking a look at a bottom-up approach to estimating the market size for a business plan.

Bottom-up approach example

On my sister site, InvestSomeMoney.com, I researched three real-life examples of a bottom up market sizing approach . In those examples, you’ll see that they sometimes mix in a little top-down analysis with their bottom-up approach and vice versa. There’s no rule against doing that, but I would rather look at things from two totally different perspectives.

When using a bottom-up approach, try to start with the most simplistic piece of firm information you can get your hands on. Then, start to build on it with other information, or the best guess you can muster.

You can think of a bottom-up approach as one that focuses on how much and how often customers will buy.

This information might be something you have internally. Or, it might be from the information you found by researching online. Start with a single “serving size” of your product/service. Then, think about how often a customer would buy. Work your way up from there.

A bottom-up approach for my business plan

As mentioned in earlier posts about business plans – I’m building one as I write these. My theoretical product is an all-natural topical hair loss treatment.

In the post linked above, I performed something of a top-down analysis of market size for a business plan. I later discovered that I was operating with incomplete information .

There’s still a lot to consider regarding packaging volume and dosage. That will require more thought. But, for the time being, I’m going to estimate the volume of a one month’s supply and the daily dosage to be the same as Rogaine. If that changes as I progress with my business plan, I can easily circle back to this and plug in different numbers.

With Rogaine as my benchmark, I know that a dosage of my product would be 1 mL. The product would be used twice a day. My product would come in 2 oz (60 ml) bottles. Each bottle would be one month’s supply, as I said.

Thinking about capacity

Okay. Now that I have a grasp on the package size – what about blending and packaging? If this idea were to come to fruition, I don’t picture myself blending batches in my bathtub and filling bottles with a ladle and a funnel. I would need access to some sort of industrial equipment.

Fortunately, a quick internet search shows that there is no shortage of contract blenders and packagers out there. Especially for food and supplements. What it costs, remains to be seen. That’s an issue for another time. For now, I just want to get an idea of how much I could manufacture.

This company claims it can blend 1.25 million pounds per workday. We’ll assume, for now, this represents the average contract blender/packager. What does that translate into in terms of 2 oz bottles?

First of all, I wouldn’t need all 26 of their kettles. Only one, tops, especially at startup. So, if we divide the 1.25 million pounds by 26, we get a per kettle capacity of about 48,000 lbs per day.

Pounds are a weight unit of measure (UOM) and ounces are a volume UOM. To make the conversion, we’re going to have to do some more estimating.

Water weighs a little over 8 lbs/gallon. We’ll assume my product has roughly the same density.

8 lbs ÷ 128 oz (per gallon) = .0625 lbs/oz. With each bottle containing 2 oz, we know that it’ll weigh approximately .125 lbs/bottle.

This means that with one of this company’s kettles, I could blend 384,615 bottles worth of product per day. 96.5 million bottles per year. At an approximate sales price of $7.50 per bottle, that translates into nearly $725 million in revenue per year.

Okay, I’ve looked at things from a bottom-up, capacity-focused approach. Let’s now consider a top-down, demographic-focused analysis.

Top-down analysis

Not surprisingly, I also wrote a post on InvestSomeMoney.com with examples of a top-down analysis to determine market size for a business plan . When you read through it, you might notice that some of the examples use Census data (or something similar). They take big chunks of information and start narrowing down their market from there.

Which brings us to three important terms for performing a top-down analysis. These are:

Total addressable market (TAM) Serviceable available market (SAM) and Serviceable obtainable market (SOM)

A SOM is a fraction of the SAM. In turn, a SAM is part of the TAM.

The TAM can be thought of as every potential customer that you can reach geographically. The SAM is what’s left when you niche down a little into the population that is a good fit for your unique selling proposition. Finally, the SOM represents the percentage of the SAM you can realistically expect to take.

It’s unlikely that you will ever capture 100% of the SAM. Even in a specific niche, you can’t be everything to everyone. That’s alright, though. The goal of this exercise is to make realistic estimates so that you have a sound business plan to work from.

When doing a top-down analysis, start with a large population or an overall industry size. From there, narrow down your customer until you arrive at your SOM. It helps to have a “customer avatar” in mind before starting a top-down analysis so you know where to niche down to.

I would suggest you perform a business plan demand analysis first to get a crystal clear picture of what that avatar is. You might think you know it intuitively. But you might be surprised at what you find – like I was!

A top-down analysis for my business plan

I know that not every person in the U.S. (much less the world) is going to want or need an all-natural topical supplement for hair loss. Who might though???

I’ll refer back to my handy-dandy business plan demand analysis (linked above) to see what I can find.

Here, I’m reminded of the ages that men and women first started experiencing hair loss. I’m reminded of the percentage that has sought any sort of treatment. Finally, I’m given an idea of what types of treatment they have tried.

A quick visit to Data.Census.Gov and I find table S0101, which gives me the U.S. population by age and sex. I customize and filter the table real quick. Then, I copy and paste the data I need into my spreadsheet.

Next step is to narrow these numbers down. I’ll use the “regular” numbers and the pessimistic numbers from sensitivity analysis from my business plan demand workbook .

I want to know the percentage of men who have had hair loss and tried any sort of treatment. Then, I want to go deeper and estimate the number that has found supplements to be effective. I’ll do this for both the most-likely and the worst-case scenarios. On the women’s side, I’ll do, more or less, the same thing.

TAM and SAM

You’ll see that I didn’t use the same age ranges for men and women. I assumed that males would start experiencing hair loss earlier, but would also stop caring about it earlier too.

The age range for males in my TAM was 20 – 54. For females, it was 25 – 59. This translates into a TAM of 151 million people in the U.S.

For the SAM, my worst-case scenario estimated that .9% of the male population in the target age ranges would be part of my market. 1.54% of females in the target age ranges were also assumed to be part of my market. This translated into a worst-case SAM of 1.8 million people.

As for my most-likely SAM, I estimated that 1.41% of males and 2.4% of females in the target age ranges were potential customers. This resulted in a SAM of 2.88 million people. Over a million more potential customers.

SOM is tricky.

Who’s to say what percentage of the SAM my company could capture? Obviously, it would start at 0% and work its way up from there. Where would it stop though?

It will depend, in part, on the number of companies vying for this niche. As I often do, I will refer to the Pareto principle. The Pareto principle states that 20% of the inputs will be responsible for 80% of the outputs. Put another way, 20% of the companies will have roughly 80% of the market share.

I’ll refer back, again, to my post on business plan demand. In it, I found three direct substitutions for my topical hair loss product. I won’t include Minoxidil (Rogaine) in that group, because of its unnatural chemistry.

Again, without getting too mired in math, I estimate that there are approximately thirty companies in the topical hair loss supplement space. This was a quick and dirty estimate based on the results of an internet search.

Six of those thirty companies probably control 80% of the market. That leaves 4.2% (1 ÷ 24) of the remaining 20% as my short-term SOM. Obviously, if my product were to take off, that amount could grow considerably and could approach the SAM.

What that means as far as the market size is 15K people worst-case and 24K people most-likely. At 12 bottles purchased per year, this translates into 184K and 287.5K bottles per year respectively.

Here’s a look at the spreadsheet breaking that all down:

Comparing a bottom-up and top-down analysis when determining market size for a business plan

Obviously, a couple hundred thousand bottles (top-down) is a far cry from 96.5 million (bottom-up). So, it would appear I will not be capacity constrained in the near future. In fact, as this startup moves forward, I need to make sure I’m not over-buying capacity. Those huge fixed costs could kill my business before it has a chance to get off the ground.

Speaking of fixed costs, the information from this analysis has given me good data to build my pro forma financials – when that time comes.

Now, at some point in the future, selling my product internationally could be an option. However, in this tiny niche, it is unlikely that I’ll ever need that much capacity for this one product.

Market size for a business plan

What were there factors I didn’t consider (but should have) when estimating my potential market size?

How might you have approached this differently?

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How to Determine Your Market Size

Here's how to use the top-down or bottom up approach to determine your market size.

July 25, 2017 Marketing Tips

If you’re writing your marketing plan , one of the elements that a standard marketing plan asks for is your market size.

Understanding the size of your market gives you important information that can help you:

• Gauge your existing market share by comparing total spending or total units sold to your metrics
• Understand how effectively you can compete in the market
• Quantify future growth opportunity
• Determine if you should enter the market (if it’s new)

It’s also important if you’re a startup seeking funding or launching a new product or service . If this is the case, start by creating a detailed target customer profile. To whom are you selling? What does a typical customer look like?

You may also want to define your market segments to see if you should determine your market size for your submarkets. Think about what your target customers have in common. If you’re B2B, think in terms of company size, annual revenue, number of employees, etc. If you’re B2C, evaluate the demographics. This will help you to group your market into segments or personas.

Market Size Option 1: Purchase It

While some industries publish detailed market size data, most don’t (or it’s very expensive). If you have the budget, then this is the fastest way to complete this task. Search for industry-specific firms, or review available reports at a site like MarketResearch.com .

Market Size Option 2: Outsource It

If you can’t find it directly for sale, you can hire a market research firm to determine your market size for you.

Here are some examples of market research firms listed in the  GreenBook Research Industry Trends  report:

• Brainjuicer
• Vision Critical
• Anderson Analytics
• Peanut Labs

Market Size Option 3: Estimate It

If you don’t have the ability to hire a market research firm to analyze a new market or your existing market, you’ll need to complete the work with your internal resources and reports.

Gather as much market numerical data as you can find — industry reports, external market data and your own experience with the market. Most companies have a few people on staff who have a good understanding of the total market size, so make sure to get their opinion while conducting your research.

Start by estimating the total number of potential customers in your market . This number may be difficult to estimate if you’re in an early-stage growth market. If you’re in a mature market without room for growth, it will simply be the total number of unit sales in the existing market.

Since it’s unlikely you’ll find a single source that provides the exact unit sales and total revenue for your market in your geography, you might have to piece together different sources of information from different time periods and locations.

If you’re pressed for time, you can always estimate and iterate as you gather more data. For example, if you sell 10,000 units per year in your market, and you estimate that you own 5% of that market, a solid starting estimate is that your market has 200,000 potential customers (10,000 / .05). This is a top-down approach.

Or, if you’re able to find the unit sales for your product or service in another geography, say Canada for example (and your market is the United States), you can also extrapolate:

• 1,000,000 sales in Canada
• 321 million people in United States / 35 million people in Canada = 9.17
• 1,000,000 * 9.17 = 9,170,000

Then estimate the total annual sales (revenue) for the product or service in your market . For example, if you sell a red widget, what is the total spending on red widgets in your market each year? A B2B example would be that there was $4.5 billion of sales of CRM software in the U.S., in 2016. A B2C example would be that there was $750 million of sales of hiking boots in the U.K. in 2015.

You can also use the bottom-up approach, which is calculated by taking the number of potential customers in the market and multiplying it by the average selling price of the product or service sold to these customers. For example, if a market has 50,000 potential customers for a $1,000 per unit you can estimate that the total market is $50,000,000.

After you have your market size estimates, you may wish to complete your demographic or qualitative market research and perform a competitive analysis. These step-by-step plans can help:

• Perform Qualitative Market Research
• Perform a Competitive Analysis

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How to do Market Sizing

Learn how market sizing can help you make informed strategic decisions for your business. Discover the key steps and benefits with this market sizing cheat sheet.

As a business operator, you already understand the value of strategic planning . When you gather data and perform analysis before making essential decisions, you can avoid a lot of pitfalls and steer the business in a healthy direction.

One aspect of strategic planning that many businesses still overlook is market size. It’s a process that can help you determine the value of a new business strategy before it is instituted.

If you’re looking to expand your products or services, grow your audience , or if you’re looking to break into new locations, using a market sizing approach should be one of your first steps.

Take a few minutes to learn more about what market sizing is, how it works, and how it can help you with your strategic planning. When you learn how to fit it into your existing operation, you’ll have one more tool pushing your business to greater heights.

What is market sizing?

As the name suggests, market sizing is the process of figuring out how large a market size is for a particular product or service.

More specifically, it’s an attempt to estimate the total number of buyers in a target region for that good or service and how much revenue those buyers can generate.

Figuring out how many people are potential customers (your target market) is essential for businesses. It enables you to gauge the true potential of your business model, and using that information, you can allocate resources accordingly.

Here’s a simple market sizing example. Imagine Walmart wants to open a new store in a small town.

Understanding their market size, they can estimate the monthly revenue for the new store. That can help them determine how large the store should be and how much product to carry. Without these estimates, they could overinvest in the town, and the store might fail.

While Walmart provides an opaque example, this applies just as well to any niche market .

How to determine market size

You can get an extremely generalized estimate of your market size by doing a simple calculation.

First, what is the population size of the people in the market (or what is the market size?)?

For the Walmart example, it’s the total number of adults in the new town. For a business that sells web development services, it’s the total number of businesses in the area that could benefit from a website.

Multiply the population size by your average sale (or average expected sale) value. That’s your market potential.

Naturally, this is a high-end estimate, but it can help you determine the upper limit of your business plan’s potential.

Benefits of market sizing for businesses

At this point, the market sizing question might sound interesting, but there’s still a lot to cover. Estimating a new market size is a tricky business.

What makes it worth the effort and cost?

Implementing a market sizing approach comes with some powerful benefits. The information you gain can inform all kinds of business decisions. In particular, market sizing can help you understand demand, find customers, size up the competition, and figure out long-term market trends.

Understanding the demand for your product or service

Estimating total market demand can be tricky , but it’s invaluable. When you have a clear grasp on how popular or in-demand your offer will be, it cleans up revenue estimates.

That, in turn, gives you mathematical values to determine marketing budgets, profit margins, and all of the numbers that go into determining your bottom line.

Understanding demand empowers you to make informed decisions at every step.

Identifying target customers

Identifying target customers is useful for estimating the market size in the first place, but that’s only the beginning.

Identifying your target market can help you figure out exactly when and where to focus your marketing efforts. You have to find customers in order to sell to them, and market sizing can give you a head start on that front.

Evaluating competition

Advanced market sizing methods won’t just tell you how big your potential market currently is. It will also estimate market saturation. In other words, the research will tell you how many people have access to competing products or services.

When you combine this type of competitor analysis with other metrics like demand, you can make even cleaner business estimates. You can also get a feel for what it will take to compete with existing businesses, and you can build that into your marketing strategies early.

Determining market trends

Lastly, you can estimate market trends while you gauge the overall market for your new business line. Obviously, it’s important to know if your industry and market are likely to grow or shrink.

In either case, you can strategize around trends and think about your specific market fit . Maybe your new service is best used as a temporary means to boost business.

Maybe, it’s the future direction for the whole organization. Market trends can help you think in these terms.

How to calculate market size

Comprehensive market sizing involves a deep look at many different metrics and aspects of the target market. It’s an involved process.

Whether you perform all of the research on your own, or you outsource market sizing to specialists, you want to make sure the research hits four major areas.

Conduct market research

Market research is where you get detailed information about potential buyers. This is where you investigate closely to determine how many people in an area are likely to purchase your product or service.

This is best done by taking a look at competitors (to see how much they’re already selling things similar to your offer), direct feedback (with surveys, social media polls, and/or focus groups), and population data (like total spending in the area and household spending reports).

Analyze market data

Once you collect all of your market data, it’s time for analytics. There are a few limits to how deep you can go with your analysis, but there are a few key points to include.

First, try to get a timeline for all of your data. This helps you establish trends to see if interest and/or spending is growing or shrinking over time. Time-dependent trends are helpful in any area you want to analyze.

Second, be meticulous about variance in the data. Some data will be extremely valuable. Other groups of data won’t be as telling. Diligent reporting of variance will help you tell the difference.

Third, try to tie your metrics to monetary value. The primary goal of this research is to figure out how to allocate resources, so in any reasonable way possible, figure out the dollar value of each metric.

Calculate market size

With all of this information, you’re going to try to estimate your expected total sales. You want high and low estimates to really set the stage for your business strategy. Remember to calculate revenue and profit margins while you’re at it.

The goal here is to see the raw finances in your new market before you fully invest.

Use industry benchmarks

Lastly, you can take a deeper look by running your numbers through standardized benchmark comparisons. Cash flow forecasting, NPVs, and IRRs are examples of well-established analytics that can set benchmarks for comparison.

The industry benchmarks will also help you highlight your modeling assumptions, and you can further test the impact of those assumptions on your projections. This helps you clean up your estimation ranges and ultimately improves the value of your market sizing overall.

Potential limits of market sizing

Market sizing is a powerful tool that can help you make better business decisions while you’re still in the planning phase. But, it’s not perfect, and it’s not a magic bullet. It’s just a way to increase the amount of information you have available to inform your business decisions.

It can help to look at some of the common limitations of this analytical process.

The first limitation has to do with your assumptions. At the end of the day, you don’t know how many people will buy your stuff, and you don’t know how much they will buy when they do make a purchase. You can only guess, and regardless of how hard you try, your guess will never be perfect.

Another limitation is something that impairs any attempt to predict the future. There are always complete unknowns that you can’t anticipate. Natural disasters can reshape your market in an instant. Unexpected legislation or regulations could change the rules of your industry.

The unexpected is vast, and market sizing can’t account for it at all.

Last, and most important, is that market sizing can breed overconfidence. It’s a way to gauge potential, not a guarantee.

When market sizing data looks promising, it can be easy to get overly optimistic, and that can lead to risky investment behavior. If you keep decisions grounded, though, market sizing is on your list of useful tools that can improve your business strategy.

Use market sizing for strategic business planning

As we know by now, market sizing is a crucial step in strategic business planning that involves estimating the potential market demand for a product or service.

It provides an understanding of the size and growth potential of the market, the competition, and the market share that a company can capture.

By using market sizing, businesses can identify growth opportunities, optimize pricing, develop marketing strategies, and make informed decisions about investments and resource allocation.

By following the key steps of market sizing, businesses can make informed decisions about their products, services, and overall business strategy. Incorporating market size data into your planning process can help you stay ahead of the competition and achieve long-term success.

If you haven’t been utilizing market sizing for your business strategy, it’s time to take a closer look, and Mailchimp can help. You’ll find a long list of resources that can amplify your market sizing and many other aspects of business planning and execution.

More From Forbes

How to effectively determine your market size.

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One of the most crucial tasks an entrepreneur has is to calculate the size of their market, and the potential value that market has for their startup business. Without this data you can’t create a viable business plan, or be taken seriously when approaching potential investors.

As described in my book, The Art of Startup Fundraising , the market needs to be in the billions. Otherwise, even if you have the perfect team and product the returns will be limited for potential investors making your investment opportunity less attractive.

Market Size for Startups

Determining the market size is critical. It tells you and your partners, team and investors how much potential business is really out there. It helps calculate how much value there really is for your individual venture. This is critical to know, even if you never plan to raise a dime in outside capital.

Market size becomes far more important if you ever need to raise funding for your business. It is one of the most basic digits every potential angel and VC investor is going to expect. Even your friends and family should be asking about it during seed and pre-seed financing rounds. Coming up empty handed is going to destroy your credibility instantly.

Unfortunately, this is one factor which entrepreneurs frequently blow when formulating initial plans, stepping out into a new business and when pitching investors. So, how do you do it right?

How to Determine Market Size

To calculate your market size, you’ll either be looking for data on the number of potential customer, or number of transactions each year.

For example; if you are selling toothbrushes, virtually everyone can be counted in your big whole market figure. If people are listening to their dentists, and they are purchasing new toothbrushes 2-4 times per year, that number is even larger. If you are selling houses, then there may only be an average of 5.34M transactions in a good year, in the entire United States.

The Art of Startup Fundraising book

Keep in mind:  

• Show projections going out 3 years (it’s hard to accurately analyze after that)
• Account for organic growth or decline in the years ahead
• Your roll out to geographic areas over time

There are a variety of ways to acquire this data. Census and labor bureau hold a lot of information, and most industries have formal associations which compile and track this type of data. You can also commission your own research or purchase studies.

Once you have the data you want to make sure that you are presenting it in a powerful way in your pitch deck since it is one of the most important slides. A good pitch deck template is the one created by Silicon Valley legend, Peter Thiel ( see it here ) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Thiel actually includes not one, but two slides around the market and its size. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M ( see it here ).

Below is another example of how to show in your pitch deck your market growing over time.

How to Determine Market Value

Market size, or the number of potential customers or unit sales is one thing. How much that is worth, is a completely different, and perhaps more important figure.

You need to know how much revenue that market has to offer. For example; UpNest is one of the fastest growing real estate tech startups, which helps home buyers and sellers save on Realtor commissions. If the average home price is $394,300, and there are 5M sales per year, and the average Realtor commission is 5% of the sales price, and 90% of users use a Realtor, UpNest is in an $88.7B per year industry. Or has a market size of $88.7B.

Determining Total Addressable Market (TAM)

Realistically, no startup should or can expect to gain 100% market share. Trying to capture an entire market, without first targeting several niches, price points, customer sizes or geo areas for roll out, is going to be financial suicide for the vast majority of entrepreneurs.

For example; even giant online real estate firm Zillow, which dominates the marketplace, has far more modest estimates for its own new venture in buying and flipping houses directly with consumers. The company’s CEO recently said that if it could acquire 275,000 units a $3,500 profit each, it would be doing very well. That’s about $1B a year from just one extra revenue stream, at just over 18% of the available market share.

Of course, most new startups can’t expect to even command that much market share. Even if you could, most seasoned investors won’t believe it until you prove it. Tx Zhuo of Karlin Ventures says “If it’s 1 to 5 percent of the pie, you have a realistic plan.”

If you have no idea what’s a reasonable amount of market share in your industry, Projection Hub says one hack is to anonymously call around to all of your local competitors and find out how much volume they are doing. Then estimate you’ll be doing a fraction of that as you gain traction.

Also factor in the static versus evolving marketplace. Do population growth rates mean there will be more prospective customers in your market in 5 years, or less? Don’t forget to factor in your own impact on the market.

For example; if you were Amazon a decade ago, you should have factored in the fact that you are about to destroy the marketplace for regular bookstores. Their price cutting also slashed the value of the market in a huge way.

Early stage startup investor at Matrix Partners, Jared Sleeper notes there are actually :three distinct ways to calculate TAM.”

• Top-down, using industry research and reports.
• Bottom-up, using data from early selling efforts.
• Value theory, using conjecture about buyer willingness to pay.

It’s best to know them all before you go into an investor meeting, or finish polishing your pitch deck.

Knowing your market size is a basic foundational part of launching any startup venture. Every entrepreneur needs to know how to calculate it, and how it relates to potential revenue in their addressable market.

Be realistic. Investors like big numbers, but don’t have patience for flakes over-inflating numbers. You should be able to show the potential to achieve VC sized growth and returns over time. Just make sure you can back up your claims with the data and research, you derived your numbers from, and how you arrived at your assumptions.

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How to calculate market size potential in 3 easy steps

Got an awesome product you’re ready to bring to market? You’ll need to do your homework, and that means learning how to calculate your market size potential.

Conducting an in-depth market segmentation or sizing study can cost a lot of money and often requires research expertise. Here’s how to get a solid steer on your potential market size without saying goodbye to your (entire!) marketing budget. Hint: we can help!

How to quickly calculate market size potential

Calculating market size can help you create better marketing, sales, and development strategies for that specific market. How can you quickly calculate it though?

TL;DR—You’ll need to follow these simple three steps:

• Step 1: Define your audience and total addressable market (TAM)
• Step 2: Gather wider market size intel
• Step 3: Use the market size calculation formula

We’ll get down to what each of these steps entails, but first let’s find out what market size actually is .

What is market size?

Market size is the number of individuals in a certain market who are potential customers of your product or service. Depending on your distribution strategy, you’ll probably also want to look at the number of potential sellers of your product or service . 

When measuring market size there are two ways to approach it: top down and bottom up. 

Let’s look at each:

Top down market sizing

The top down market sizing approach focuses on seeing what the current market is like and applying what you find to your business.

For example, let’s say you sell your services to creative agencies and there are 100 creative agencies across the UK, however you currently only sell to eight of these agencies. You can calculate that your average sale among the eight creative agencies that you work with is £5,000. This would mean that your top down market size is £500,000.

However, this number is likely unrealistic and it won’t really tell you much. After all, not all the agencies will decide to work with you, nor will you sustain the same selling average.

Bottom up market sizing

For the bottom up approach you look at your own segment data, and then you look at secondary research to understand what’s expected to happen to those segments.

Although the bottom up approach can be more time consuming and will require you to better study and analyse your market, at the end it results in a more realistic and trustworthy number.

For example, let’s say 60% of your marketing agency business goes to big corporations, and 40% goes to small and medium-sized companies. If secondary research of your market says that big corporations are relying less on agency work because they’re hiring in-house teams and you know there’s an increase in the number of new startups entering your market, then you can act accordingly and focus on providing better solutions to SMBs.

These two ways to calculate market size help you understand the size of the opportunity in any given market . That said, it’s also important to consider other factors such as the indirect competition – we’ll address this in a bit. 

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Let’s understand why market size is important.

Why is market size important?

If you create a business plan that doesn’t cover market size, you’re likely to be sent packing by any potential investor. Without market size data you can’t create a viable business plan, it’s the only thing that gives you an idea of the potential value of your product or service. Market size is essential even if you’re not seeking third-party funding.

Let’s say you have the patent to a revolutionary new software tool; it’s easy to assume everyone will want it. So you might say: “my market is all American adults,” but this is naive and not backed with evidence. You’ll never sell your product to all American adults, no matter how great the product is! 

There will be a certain type of person who really does want to buy your tool and your job is to nail down who that person is—and then work out how many of those individuals like them there are in the market. This might sound difficult, but thanks to the wealth of data tools available nowadays, it’s easier than you think.

How to use your estimated market size

Before we cover how to calculate your market size, it’s important to know how you’ll be able to use this number.

Market size helps business owners answer the following questions: 

• What’s the potential revenue from this particular market?
• Is the market big enough? Will it be worth it to invest time and money in? 
• Is this a growing market? Will there be opportunities after three, five, or ten years?

These are key questions when trying to start or maintain any business. Now, without further ado, let’s take a look at how to calculate market size.

How to calculate your market size

Calculating your market size shouldn’t be complicated. In fact, it can be done in three simple steps:

1. Define your target audience and Total Addressable Market (TAM)

Your target customers are the people for whom your product or service solves a specific problem.

Identifying who these people are is a lot easier if you’re already active in one market. There are three ways to group your target audience’s market: TAM, SAM, and SOM – worry not, we’ll go through what each of these mean.

Total addressable market (TAM) TAM is the total demand there is for a product like yours. If you’re creating an energy drink, your TAM will be estimating everyone that might consume your product: students, drivers, athletes, the lot.

Serviceable available market (SAM) SAM is the people in the TAM that could feasibly reach your product. Let’s say you’ll only sell it at a specific supermarket that’s only available in the southern cities of England, those within your TAM that are also in the southern cities of England will be your SAM.

Serviceable obtainable market (SOM) SOM is the smallest subset of the available market that you’ll want to capture through your marketing and sales efforts. These are those customers that are in your SAM, but are currently not being served, or are unhappy with the existing market offerings, or those that would actually be willing to try a new version of the product they already use.

If you can use existing data

Examine the profiles of your existing customers – what do you know about them? In addition to looking at demographic information like age, gender, geographical location and socio-economic background, engage in a conversation with your customers to find out why they buy your product and why they buy your brand specifically.

If you need to start from scratch

If you’re starting from scratch with a new product or service, you’ll need to come up with some hypotheses to test. 

For example, let’s say you’ve invented a wearable device that automatically tracks how many calories you’ve consumed. You can probably assume it will be of interest to men and women trying to live a healthier lifestyle, as well as sportspeople who need control over their diets and workout routine. There could be further demand from employers or health insurance providers who want to incentivise people to maintain a healthy diet.   

You can gather initial data from a bit of desk research – for example, this government-published statistic tells us that 62% of adults in the UK are overweight . But don’t stop there, now’s the time to delve a bit further by carrying out some consumer research.

Through a market research and brand tracking tool like Attest, you can access more 125 million people in 59 countries, which means you can test real demand with a subset of your target audience.

For example, you could find out:

• How many people are actively trying to live a healthier lifestyle? 
• Why is a healthier lifestyle important to them?
• What are their pain points when trying to do this?
• What products do they currently use to help them improve their health?
• Would they be interested in your product?
• How likely would they be to buy it?
• How much would they be willing to spend if they are interested?

To further define your target customer, you can then analyse their demographics (these are built-in to the Attest platform) and look for trends. Perhaps you see that professional women, living in London and the south east, aged between 30 to 50 are showing the highest purchase intent. You can then create profiles of your prime potential customers.

Once you’ve got a good indication of who your product or service is relevant to, a larger market segmentation exercise makes sense – it’ll help you prioritise your efforts and understand the true potential size of the market. 

2. Gather wider market size intel

To get the full picture, you’ll want to enhance your findings by gathering further information on your industry. 

Most industries have formal associations which compile and track industry size data. You can find out, for example, how much the industry is worth, how much is spent annually on specific product types and average retail prices. 

It’s worth spending some time working out which industry your product or service actually sits in. Knowing your industry helps you understand who your competition is.

To get more clarity on who your competitors are, try drawing up a market map. Market mapping involves arranging competing products on an axis according to their positioning. For example, whether they are high or low-cost or whether they are complex or basic (see the below example.) 

In an ideal world, market mapping will highlight that your product falls into a unique niche. For example, your product could be the highest quality product being offered at a low price point. This immediately gives you a point of difference, giving investors a compelling reason to believe you’ll be able to steal market share.

Use consumer research

You can use your consumer research to back up your market positioning, like social enterprise Divine Chocolate did. The chocolate bar maker identified that some consumers were prepared to pay a premium price for very high-quality chocolate made from Fairtrade cocoa. It saw that there was little competition in this space and successfully claimed the position. 

If you do find a gap in the market, it’s important to be sure why others aren’t filling it. It may be that the demand from consumers just isn’t there, so be sure to combine your study of the market with actual feedback from consumers.

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Run brand perception research

Brand perception is about what your consumers think and feel about your brand. Not just as an opinion, but as a deeper subconscious sentiment that they have developed after interacting with your brand, your products, your international marketing and messaging, and yes, even your competition.

Brand perception is not what you want customers to feel towards your brand. It’s about what the customers believe you stand for. Ideally, these two would be the same, but in reality it’s hard to influence your customers so directly; that’s why you need to research your brand perception – and also that of your competitors.

Brand perception can affect the type of customers you attract, your price point, and the partnerships you can build with other brands. So, make sure you measure your brand’s reputation and perception .

Use market research surveys

The best way to gather market-wide information is through market research surveys using market research services . These tools will help you collect important information from various demographics, and types of customers.

Market research used to be done face-to-face or through lengthy, cumbersome calls. Today  you can have great insights, data ready for reporting, and a global reach with online market research surveys . They help you take the guesswork out of market research while keeping your process scalable and inclusive.

Once you’ve narrowed down your target market size and customers, and you’ve studied the market at length, you’re ready to calculate market size.

3. Use the market size calculation formula

Your market research will give you a lot of information that you’ll need to analyse and understand. Let’s look at how to plug this information in a formula for estimating market size.

For example, let’s say you produce chocolate. If you plan to be stocked in independent food stores, but you find there are few of these types of outlets in the Midlands – a location where you see high purchase intent– this will affect these consumers’ ability to buy and will reduce your potential sales. 

You have to take factors like this into consideration and look at the ‘ available market. ’ The available market is those who have both interest and the ability to buy – this is your number of target customers.

Once you have this figure, you need to multiply it by the quantity of your product an average buyer will purchase in a given time period, like a year. In the case of our fictional calorie counting device, this is likely to be a one-off purchase, but if it’s a consumable you’re selling, purchase frequency will be far higher. Use your industry data and consumer brand research to estimate this figure – and be realistic!

Making projections about the size of a market

Market size is the maximum total number of sales or customers your business can see, often measured over the course of a specific period of time – often a year. Knowing what your potential market size is will help you when gauging your next business steps, whether or not an investment in a new product is worth it, or what growth is to be expected.

The next step in calculating market size is to engage in a bit of future-gazing. Is your market likely to grow or shrink in the future? You can look at historical data to analyse the market’s performance – is it on an upward trajectory?

Now, think about your customer base—is that likely to get bigger? If we go back to the example of the calorie tracker, there’s plenty of available data to show that the overweight population is growing . Will there be more prospective customers in your market in the next few years? If you can show your marketplace isn’t static and is instead evolving, there’s greater reason to believe in a successful future for your product.

When presenting market size and market value statistics for your business, try to make one, two and three-year projections. Don’t forget to factor in your anticipated roll-out to other geographic areas over time or improved distribution plan. 

You also need to consider your own impact on the industry. What’s your disruptive potential? Most startups are coming to market with an innovative product or service and this can dramatically change the landscape. Think of the way digital cameras virtually destroyed the market for film cameras – and film developing – or the effect Amazon’s Kindle had on regular bookstores.

On the other hand, are there other companies’ products or services on the horizon that threaten the industry as you know it? Do as much research as possible by looking at patents being filed, reading industry media and setting up Google alerts for relevant keywords to keep abreast of things in development. 

How to calculate market size: an example

Let’s say your product is a face wash for people with acne – you can reasonably expect people to get through one tube of it per month. If there are 500,000 target customers in your market, this means the total volume of market demand for acne face wash is 500,000 x 12 (months a year) = 6 million a year. If the average price of acne face wash is £10 a tube, then market value is 6 million x £10 = £60 million.

Another calculation you can do is estimating the percentage of market share you will be able to command. For example, if you know the face wash and cleanser industry as a whole is worth £1 billion annually, you can realistically expect to capture between 1% to 5%. In terms of value, that equates to between £10 million and £50 million.

Summing up your market sizing exercise

Now you’ve learned how to determine market potential (number of target users x purchases expected in a given period of time = market size or volume). Now, you can add this information into your pitch deck so potential investors can see what the estimated earnings can be. 

Bear in mind that most VCs and angel investors would like to know they’re investing in a market with a large potential size (typically, at least £1 billion). If your numbers are smaller than this, don’t be tempted to over-inflate them. Be honest and explain why you believe in the market’s potential… or why it’s important to bring your product to market. For example, it’s going to make the world a better place. 

Investors’ investment philosophies differ, so there’s every chance you can find your match with the right research in hand.

Understand your market size to ensure success

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Market Size FAQ

To calculate market size you need to follow three simple steps: 1. Define your target audience and total addressable market (TAM) 2. Use consumer, brand perception, and market research to gather wide market size intel to find out which gaps in the market there are,  the current and future competitors, and what consumers think of your brand.  3. Use the market size calculation formula (number of target users x purchases expected in a given period of time = market size or volume) to better understand your target market potential.

Here’s an example of a market size calculation: let’s say your product is a face wash for people with acne. You estimate that people will get through one tube per month. If you have 500,000 target customers, this means that the total volume of market demand for acne face wash is 500,000 x 12, because there are 12 months in a year. This is equal to 6 million a year.  Now, to calculate market value you take the 6 million and multiply it by the average price of your product: 6 million x £10 = £60 million. That’s your potential market size and value. 

A good market size will depend on your industry and product. However, investors will normally be looking for a market potential size of at least £1 billion. Don’t get discouraged if you didn’t find that’s your potential market, there are other factors to consider when entering a market.  

Customer Research Lead 

Nick joined Attest in 2021, with more than 10 years' experience in market research and consumer insights on both agency and brand sides. As part of the Customer Research Team team, Nick takes a hands-on role supporting customers uncover insights and opportunities for growth.

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How to Write and Conduct a Market Analysis

3 min. read

Updated January 3, 2024

A market is the total sum of prospective buyers, individuals, or organizations that are willing and able to purchase a business’s potential offering. A market analysis is a detailed assessment of the market you intend to enter. It provides insight into the size and value of the market, potential customer segments, and their buying patterns.

In this section, we’ll be covering what information to include in your business plan after completing your research. If you’re struggling with the research itself, you should check out our market research resources for step-by-step guidance.

• How to write your market analysis

The information featured in your market analysis should focus on firmly defining who your customers are. Here are the two steps you need to take:

Define your target market

Finding your target market requires segmentation based on demographic and psychographic information until you reach the ideal customer. You need to address who they are and how you identified them.

Target market examples

A target market analysis is a key part of any business plan. Let’s walk you through some examples.

Determine your market size

Identifying your potential customers isn’t enough. You also need to prove that the size of the market can support your business. To do this, it’s helpful to define what’s available, serviceable, and can be obtained.

Optional information to include

The main purpose of the market analysis is to show who your customers are. While defining your target market may be enough, it can be helpful to include some of the following supporting details.

Show that you know your industry

Before starting a business, you should know the state of your industry and where it’s headed. This includes industry metrics you’ve collected, any barriers to entry, emerging trends, or common success factors.

Write a customer analysis

Conducting a customer analysis provides additional depth to your target audience. You’ll know them better and go beyond just segmentation.

Use a customer persona to describe your customers

It can be difficult for you, your employees, and potential investors to visualize who your customers are based solely on data. Creating a customer persona can bring them to life and support your target market choice.

• Why conduct a market analysis?

Conducting any sort of in-depth research can be a time-intensive process. However, the benefits far outweigh the investment—so much so that it’s recommended that you revisit your market analysis at least once a year in order to stay on top of emerging trends or changes in the market.

As part of your business plan, it demonstrates that you have a firm understanding of your customers. Here are the other benefits gained by completing a market analysis:

Reduce risk

If you really understand your potential customers and market conditions, you’ll have a better chance of developing a viable product or service. It also helps you explore if your idea will work or not. If you determine that the market size can’t sustain your business, there are too many barriers, high starting costs, intense competition, or some other factor that would lead to a higher chance of failure—you can pivot and avoid wasting your hard-earned time and money.

Better position your business

Researching the market landscape will help you strategically position your business. This may be done through pricing, specific features, production/distribution, or any other method to differentiate your business and make it more attractive to your target audience.

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Verify product/market fit

Part of positioning your business is determining if there is a sustainable market for your business. This starts with segmenting and identifying your ideal customers. It then involves a process of gathering feedback, gauging interest, and finding any sort of demonstrable traction. To learn more about finding product market fit, check out the market research section of our Starting a Business Guide.

Inform investors

Research is not only valuable for informing you as a business owner but in convincing investors and lenders that your idea is worth funding. In many ways, the fact that you spent time pulling together viable information is just as important as the information itself. It shows that you care about finding success as a business owner and are willing to put in the work, even at this early stage.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Market Sizing: Measuring Your TAM, SAM, and SOM

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Market sizing is all about potential. It’s the measurement every organization wants to increase. But before you start on your quest toward market domination, you need to know your market size, and only then, can you outline a strategic plan to help you get a bigger piece of the pie.

When launching a new product, diversifying your offering, or expanding into new regions, knowing your market potential BEFORE you invest time and money is key.

So, how can you work out your market size? 

Before you even think about using a syndicated research report published last year or data that’s out-of-date, let me explain how you can do market sizing with fresh data that reflects any market as it stands today – not last quarter, or last year.

What is market sizing?

Market sizing uses informed estimations to determine the potential market volume and sales revenue. Knowing how to calculate a total addressable market is just as important for those looking to launch in a new market as it is for start-ups.

Why do market sizing?

Calculating market size matters for several reasons. Here’s why.

• Allows organizations to estimate potential profit from a new product, service, or business.
• Helps investors decide whether to invest in a business or not.
• Aids the development of an effective marketing strategy that highlights the needs and potential of a core market.
• Gives a clearer picture of hiring needs before launch, helping to drive an optimized recruitment strategy.
• Doing periodic market sizing will also clarify your TAM, SAM, and SOM.

What is a market size formula?

You use a market sizing formula to estimate your market size. It’s the number of potential customers you can sell to.

How to calculate your market size

Multiple metrics go into a market sizing analysis: if you’re familiar with market size formulas you’ve probably heard of TAM, SAM, and SOM. These calculations are used to give an idea of a company’s size in relation to its market and competitors.

Here, we’ll go into detail about each metric, with bottom-up approaches on calculating them. We’ll also break down the variables contributing to your potential reachable market size.

Total Addressable Market (TAM)

TAM looks at the entire potential value of the overall market (think, the total value for toothbrush sales in the United States in a given year). The market size estimation is a huge number, and probably unattainable by one company (unless we’re talking about a monopoly). TAM can provide a framework for a market’s potential and stability.

You calculate TAM by adding up all product sales across the market. There are two ways of doing this:

• Add up figures for toothbrush sales per grocery chain, pharmacy, and retailer
• Estimate how many toothbrushes the average person buys, multiply that by the number of people in the U.S., and then by the average cost of a toothbrush

Serviceable Addressable Market (SAM)

SAM refers to the specific potential audience for your product or offering (keeping with our toothbrush example – the total value of online-only electric toothbrushes for kids). This is the maximum market value of your company based on this target market .

To calculate SAM, add up all the relevant product sales across the market (so, add up figures for online purchases of electric toothbrushes for kids).

Serviceable Obtainable Market (SOM)

SOM (also known as Share of Market) is a representation of the proportion of your SAM that you’re likely to obtain for your company. Assuming you’re not the only children’s toothbrush manufacturer, that number will be smaller than the SAM.

To calculate SOM, divide last year’s revenue by last year’s SAM. This is your market share. Now multiply your market share by the dollar-value SAM for this year.

Market size example + formula

A start-up linen company – supplying boutique hotels.

Let’s say you’re considering starting a business that supplies luxury bed linens for hotels and want to explore the opportunity. Here’s how you would calculate your market size.

Firstly, find out how many boutique hotels are in your market (we’re looking at the US market for this example). This allows you to establish the total addressable market (TAM) to which you could, in theory, sell your products.

After doing this research, you identify 50,000 hotels in North America. Of these 50,000, you only want to sell to independent hotels, which account for 10,000 establishments. You ascertain that your core target market includes 10,000 hotels. You then do further primary market research , which involves speaking with bedding and linen distributors, who confirm an approximate success rate of 25% for annual sales into luxury hotels.

Using this scenario, the following market sizing formula would be applied.

10,000 hotels x 25% = 2,500 hotels

Based on the assumption that each hotel will result in $20,000 in sales, you can work out potential revenue with the following formula.

2,500 hotels x $20,000 = $50,000,000

These figures tell you that, should you achieve a penetration rate of 25%, you could potentially generate $50 million. However, this figure doesn’t account for competitor offerings, so it’s important to be conservative when estimating how much of the market potential you can grab.

Pro Tip: If you’re launching a new product, conduct a competitive analysis and estimate your SOM based on factors such as web traffic analysis , marketing mix, and ad spend.

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Top-down vs. bottom-up market sizing

There are two approaches to market sizing – top-down and bottom-up. Neither gives you the complete picture, so it’s important to do a bit of both.

Here’s why.

Bottom-up market sizing assumes a surplus of customers in your reachable segments. With top-down market sizing, this doesn’t consider potential challenges such as ease of reaching a particular audience segment .

What is top-down market sizing?

Top-down market sizing looks at the whole market, taking a macro view of potential revenue and customers. Starting with the largest number and then refining according to realistic estimations of a target market. A top-down approach to market sizing is used to ascertain your serviceable obtainable market (SAM).

What is bottom-up market sizing?

Bottom-up market sizing starts small, then gradually gets built up. Firstly, you identify the segments you intend to reach. Then, estimations are made using assumptions (and market research) to establish growth and size. Essentially, bottom-up market sizing looks at where a product or service can be sold, the sales of comparable products, and the portion of current sales you can go after.

Top-down market sizing or bottom-up market sizing – which is best? Start any market sizing or market analysis bottom-up but add in some top-down thinking too. It’s generally good practice to meet somewhere in the middle.

You’ll know when you have a good market size estimation when both your bottom-up and top-down models align. You might need to tweak some of your assumptions in order to reach that happy place, but the updates are a positive part of the process that helps make your final estimate accurate.

Tools to estimate market size

There are ways to measure your TAM and SAM in addition to the market size formulas mentioned above. Here are a few:

Primary and secondary research: Start reading online and find external resources that give information about a market. These can come in the form of articles, case studies, whitepapers, product launch announcements, and more.

Financial reports: Public companies have to release their financial reports to the public. Capitalize on this information to see what the market looks like and specific competitors’ business plans.

Market research tools : Market research comes in many shapes and forms. You can pay a company to create a one-off report or use resources like Similarweb Digital Intelligence for on-demand access to dynamic market insights. Additionally, for businesses looking for a customizable and scalable data solution, Similarweb’s Data-as-a-Service provides tailored data feeds and APIs that integrate seamlessly with your existing tools, enhancing both market size estimations and competitive analysis.

Read more about our offering here .

Interviews and in-person visits: Talk to people in the industry to get a sense of how they see market potential , customers, and challenges. This can include studying customer segments and analyzing audience demographics .

Put it all together: Look at the figures and group all your information together to see if it all makes sense. If you have calculated a TAM of $1B, but conversations with business owners in the space point to half that, try to spot where your estimations may have skewed and adjust the TAM, SAM, and SOM accordingly.

Market sizing a micro-market

In larger organizations running multiple lines of business, each department or segment needs to size its own custom market. While this granular level of analysis was time-consuming and expensive in the past, Similarweb enables effortless customization capabilities that make the process quick, easy, and effective.

Feature Spotlight: Website Segment Analysis

See how to build a website segment in less than 60 seconds. This example is from the US finance market, specifically looking at credit card business lines across 6 key industry players. Once created, you can view the size of a market based on individual lines of business using Similarweb data.

Good market sizing involves getting deep into the numbers. Knowing your market size (AKA your TAM, SAM, and SOM) helps you build an effective strategy and make critical decisions about investing, potential growth opportunities, marketing strategies, and more. From increasing market share to new product ideation, you can use various tools and formulas for estimates that help you make smart decisions while avoiding unnecessary risks.

Here’s a market size formula chart to get you started:

Want to learn more about market sizing?

Check out our related blog posts Market Segmentation: Tips, Types, and Benefits Explained and 4 Types of Market Segmentation (Plus a Few Extras You Might Miss) .

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Market Sizing FAQ

Market sizing is the process of estimating the market’s potential size from the bottom up.

What is my market size?

Your market size is the number of potential customers you can sell a product or service to.

Are market mapping and marking sizing the same thing?

Although market sizing and mapping are similar, there are key differences. Market sizing considers the potential size of a market, which involves understanding the total potential market size from the bottom-up. Market mapping is a data-driven market research strategy that allows you to strategically position yourself in the market. This can help determine who your customers are in terms of market size and value.

How do I calculate market sizing?

• TAM (add up all product sales across the market)
• SAM (add up only relevant product sales across the market)
• SOM (divide last year’s revenue by last year’s SAM)

What other tools can I use to help calculate market size?

• Primary and secondary desk research
• Financial reports
• Market research products
• In-person interviews and visits

Why is market sizing important?

If you can accurately assess the size of a market, you can safely launch a new product, enter new regions, diversify your offering, or make any other major, costly decisions with ease.

by Liz March

Digital Research Specialist

Liz March has 15 years of experience in content creation. She enjoys the outdoors, F1, and reading, and is pursuing a BSc in Environmental Science.

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In this guide, we'll delve into the intricacies of raising capital in the US, from identifying and engaging investors to negotiating term sheets and closing the deal so you can fuel your company's growth.

How to estimate market size: Business and marketing planning for startups

Sizing the market is a necessary task for business and marketing planning, and budgeting for all startups, especially those that seek third-party financing such as venture capital (VC). Even though their investment philosophies may differ, most VCs and angel investors would like to know that they are investing in a market with a large potential size (typically, at least $1 billion).

Understanding your market potential

Even if you do not seek external financing, understanding your market potential is essential for a range of different strategic decisions, in areas such as:

• Product development
• Partnering and distribution
• Organizational design and critical employee skills

Starting point for estimating market size: Know the problem you are solving

The starting point for estimating market size is to understand the problem you solve for customers and the potential value your product generates for them. This is an aspect that many startup founders in the innovation community tend to overlook, since they get excited about the product they’ve developed without thinking about how it benefits their audience.

Depending on your technology, you may have to choose which customer problem to solve first. If this is the case, completing the exercise below may help you better grasp the market size for each application. This will make it easier to prioritize which problem to solve first.

Exercise: Estimating market size

This exercise consists of five steps to help you estimate the total market potential for a product. In each step, we build on a health innovation case study that assumes the problem we solve relates to patient safety in hospitals.

Step 1. Define your target customer

All early-stage entrepreneurs and startups must define their target customer .

Your target customer equals the person or company for whom your technology solves a specific problem. To define your target customer you must:

• Determine who your target customer is.
• Create a profile of your typical/expected target customer.

Given the importance of defining your target customer, it is crucial to set aside enough time to do a proper analysis of this first step.

Case study: We have analyzed patient-safety procedures in a few hospitals. We have determined that our innovative technology would generate the most value in the largest hospitals (the top 25%, ranked by size).

Step 2. Estimate the number of target customers

Estimate the total number of target customers in the market—companies who have a profile similar to that of your target customer.

If you’re a startup venture in Ontario or another Canadian province, you can use industry databases such as those offered by Statistics Canada, U.S. Bureau of Economic Analysis or Hoovers to help you quantify your market.

Case study: By studying publicly available sources, we have found out that in our target group there are 1,300 hospitals in Canada and the United States.

Step 3. Determine your penetration rate

Refine your market size by assuming a penetration rate for your category of product. The penetration rate is a function of the nature of your product. Assume a high penetration rate if your category of product is mission-critical or mandated through regulation; assume a low penetration rate for products with a specialized purpose.

Example: penetration rates of computers versus business intelligence systems:

• Computers, word-processing and internet: It is almost impossible today to operate a business in the developed world without a computer that has word-processing capabilities and is connected to the internet. While the penetration of those three technologies has not quite reached 100%, it is close enough to use that assumption for business growth and planning.
• Business intelligence systems: In theory, most companies would benefit from having a business intelligence system – a type of software that is used to manage and analyze data about finance, sales, and marketing activities, in addition to more specialized purposes. In practice, however, few ventures have the combination of the scale, skills and business practices required to make business intelligence systems a worthwhile investment.This limits the penetration rate to very large organizations that make up maybe less than 1% of all businesses in the developed world. Nevertheless, while 1% may not sound like a lot, it still represents a much larger number of target customers than a new startup could effectively pursue.

Case study: We have studied the factors that drive improvement in patient safety across North America, and found that it depends on provincial and state regulations. Based on areas where patient-safety regulations are strict, we can assume a penetration rate of 70% for our technology .

Step 4. Calculate the potential market size: Volume and value

Market volume.

To find the overall market potential (that is, the potential market volume), multiply your number of target customers by the penetration rate (see steps 2 and 3 above).

Case study : Using our fictitious example, where the number of target customers is 1,300 and the penetration rate is assumed to be 70%, the potential market volume would be calculated as follows:

1,300 hospitals × 70% = 910 hospitals

Market value

To calculate the monetary value of the market, multiply the market volume by your average value (that is, price expectations).

Case study: We assume each sale to a hospital will yield an average value of $2.5 million. To find the market value, we calculate the following:

910 hospitals × $ 2.5 million = $ 2.275 billion

5. Apply the market-size data

Following these steps to estimate your market size (value) is by no means an exact science. Still, there are ways to maximize the effectiveness of this exercise:

• At the time you make your first estimate, examine each assumption you make and what would cause it to change. To factor in the risks of change, calculate best-case and worst-case scenarios in addition to your expected scenario.
• Over time, monitor the accuracy of your initial assumptions and whether you need to modify them.

Case study: Our patient-safety technology may appeal to hospitals of a smaller size than initially assumed, especially if new regulations mandate tighter patient-safety procedures from all hospitals. While such a change would more than double the number of hospitals in our target market, smaller hospitals would not be able to pay as much, in turn driving the expected average price per sale down to $2 million.

Note: This exercise aims at estimating the total market potential for a product. It is important for startups to recognize that both early adopters and laggards are included in those numbers. While early adopters will likely be your customers in years 1 and 2, the laggards may not enter the market until year 20 or later. In terms of our case study, this would mean that the size of the market in year 1 would be about $100 million if early adopters comprise 5% of the overall hospital market for patient safety. For a more detailed understanding of how markets develop, read the article Technology adoption lifecycle .

The highlights

• Define your target customer
• Estimate the number of target customers
• Determine your penetration rate
• Calculate the potential market size: Volume and value
• Apply the market-size data
• The starting point? Understand the customer problem you solve and the potential value you generate.

Summary: These five steps outline how to estimate a market size—essential when making strategic decisions (e.g, business and marketing planning) and seeking third-party financing (e.g., venture capital).

Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.

Want to learn how to understand and talk to your customers? Join us for our next cohort of the Customer Development Immersive.

Case study: Data-driven decision-making in building a market expansion strategy

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What Is Market Size? & How to Determine It For New Products

Starting your own business is an exciting venture. But if you want your business to be successful, you've got to determine how big your market size is. Without knowing this metric, your business could be creating a product or service for which there's no demand. 

According to recent data from the U.S. Census Bureau , a record number of new businesses were formed. In Australia, the number of new businesses is also increasing according to the Australian Bureau of Statistics .

An important part of starting a business is market research. And an important part of market research is determining market size.  If you determine your market size correctly, you’ll have a big advantage over your competitors. 

There are many misconceptions about what market size means. That’s why in this guide, we’ll explain what market size is, why it’s important, and how to define market size. We’ll also share key steps necessary to determine the market size correctly. 

What Is Market Size?

Put simply, market size is the maximum total number of customers that you can expect to get over a certain time frame. Typically, this time frame is measured over the course of a year. 

If you own a business, it’s important to know both market size and market value. They can show you not only how many customers you can expect to get but also how much money your business can potentially make over the course of the year.

Now that you've learned a market size definition, let's take a look at why it's important.

Why Is Market Size Important?

As mentioned earlier, knowing your market size helps you understand how many customers or sales you can get. But that’s not the only reason why market size is important. 

• Secure investments . Knowing your market size and providing solid proof to potential investors on how many sales you expect to get increases your chances of actually securing that investment capital
• Determine marketing budget . It also helps you calculate more accurately how much you need to set aside for your marketing budget so you can reach those customers
• Develop marketing strategy . Once you know your market size and your marketing budget, it’s much easier to plan out your entire marketing strategy
• Plan for future hiring and growth . Knowing the potential you've got for growing your business makes it easier to determine who you need to hire and predict when you should bring on extra employees.

Market Sizing Methods

Now that we’ve covered what market size is, let’s talk about how to determine what your market size is. There are three ways to calculate it:

• top-down approach
• bottom-up approach
• value theory

Let's look at each method separately:

1. Top-Down Approach

The top-down approach to calculating market size is probably the simplest method. The downside of this approach is that it can be unreliable. This method is unreliable because it relies on what's known as the relevant market size for your product. Then it bases your potential earnings on this relevant number. 

Here’s a practical market size example. Let’s say you’re launching a business that sells marketing services to local hair salons. Your preliminary research shows that there are approximately 3000 hair salons in your city. The price for your monthly retainer services is $2500. This then translates into a market size of $7,500,000.  

This, in theory, sounds great. But not every hair salon will be interested in your services. On top of that, those that are interested, might not want an ongoing monthly retainer. Instead, they may opt for a one-time service. 

2. Bottom Up Approach

The Bottom Up approach is more time-consuming than the top down approach. It involves specific and targeted market research and doesn’t rely on forecasts or trends. Instead, you start with your price and how many items or service packages you can realistically sell. 

Going from our previous market size example , you can’t realistically serve all 3000 hair salons in your area. How many clients you can take on depends on the size of your business and the type of service you provide. For example, if you’re a solopreneur, you may only have the bandwidth to work with 3-5 clients on a retainer basis. 

3. Value Theory

The last method for calculating your market size is less precise than the bottom up approach. First, focus on the value your product or service offers compared to existing solutions. Then, make a market size estimation on how much potential customers would be willing to pay for that extra value. 

Sticking with our previous market size example , let’s say that your monthly marketing retainer includes not only creating strategy but also posting on social media and creating necessary graphics. Would your customers be willing to pay an extra $1000?  

How to Determine Market Size

Now that you know how to calculate the market size, let’s go through all the steps involved in that process. We’ll use the bottom up approach as it’s the most reliable method out of the three to calculate your market size. 

Here are the steps to follow:

1. Identify the Target Market 

The first thing you need to do is to identify the target market for your offer. In other words, you need to know who would be the perfect fit for your products or services. Your offer, ideally, solves a problem or fulfills a need in the market. Who would be the people that would benefit most from it? 

Here's a tutorial to help you identify your marketing plans:

Once you've got a general idea of who they are, consider how you can reach them. After all, there's no point in saying they're the perfect fit for your offer if you've got no way of getting your product in front of them. 

Consider these factors:

• where they spend their time online
• the publications they read
• what social media platforms they use
• what motivates them to buy

You can go even further by dividing them into different groups or segments to get an even better understanding of how your offer will appeal to them. 

After you've got a clear picture of those different segments, choose one segment that you want to focus on in the beginning stages of building your business. Keep in mind that you can expand onto other segments you’ve identified later on, after you've solidified your strategy. 

Once you’ve chosen a segment, it’s time to determine how large is the actual market in that segment. You’ll want to compile a list of potential clients and customers by using public data, any business organizations or local regulatory offices that handle the business and commerce industry.

For example , let’s say you want to develop a software that makes it easy for yoga studios to book classes online. Your research shows that there are 500 yoga studios in your city, so you compile a list with their contact information. 

2. Conduct Market Research

The next part in determining market size is to conduct market research to see how much interest there is for your product. As mentioned earlier, not everyone in your target market will be interested in what you've got to offer. 

But if you want to see if it’s worth developing your yoga class scheduling software, you need to know how many yoga studios would actually buy it.  You could start by doing competitor research and estimating their market share. But it can be hard to get realistic data this way. 

A better approach would be to speak directly to your target market either by setting up individual interviews or focus groups or conducting surveys. You could ask them:

• Would they be interested in a product like this?
• How much they would be willing to pay for it?
• Whether they would be likely to make a purchase in the next year or so. 

Discover even more about how to do market research in this tutorial:

In the example of the yoga class scheduling app , let’s say you’ve talked to 50 yoga studios. You’ve explained all the benefits that your app will provide them with. Out of those 50 studios, 15 are interested in buying it. 

You decide to err on the side of caution with your market size estimations, so you’ve reduced this number to 5 which represents 10% of your target market. Out of 500 yoga studios, this means 50 yoga studios could buy your scheduling app once it’s developed.

3. Evaluate Potential Revenue

So, you’ve identified your target market and you’ve done your market research. Now is the time to evaluate your potential revenue. There are several methods to do this. For example, you could use the cash flow forecasting using one of the three approaches recommended by the Association for Financial Professionals:

• working capital approach
• bank data approach
• statistical modeling approach 

Or you could opt for a simpler method and multiply the number of potential buyers with the price of your product or service. 

In our yoga class scheduling software example , we’ve determined that 50 studios could buy it. The price for the software is a one-time fee of $15000. That means you’d get a return of $750,000. 

Of course, you also have to account for the money you’ll have to invest to actually develop and test the software. That'll help you determine if it’s worth moving forward with the development or not. 

4. What to Do If Your Market Size Is Too Small?

What if after all the research, you’ve discovered that your market size is too small? For one, it may be harder to get investments. Secondly, too small of a market size could result in making no profit at all. 

If your market size is too small, you can consider going back to the drawing board and coming up with a new product or service idea. But if you’ve only considered your local area, you might want to expand beyond that. For example , the yoga class scheduling software can be sold to yoga studios across the country. 

Learn More About Marketing 

Do you want to learn even more about marketing your business? We've got plenty of material for you to study. Here a just a few tutorials that may help:

The Best Source for Creative Business Templates

Once you know your market size, it’s important to start promoting your business. One of the best places to find tons of creative business assets and templates is Envato Elements . Envato Elements is a subscription-based marketplace with a compelling offer. 

For a low, monthly price you get access to thousands of web themes, stock photos, social media templates, and more. 

Envato Elements has the best bang for your buck, whether you’re a designer working with many clients or a business owner with many brands to promote. Thanks to the unlimited downloads, you can try out as many creative variations and designs as you need. 

Free creative templates you find online might be tempting but they aren’t as robust as premium templates offered on Envato Elements. 

Premium templates from Envato Elements come with unique features such as: 

• plenty of customization options
• variety of layouts 
• content ideas built-in
• templates for every need: from simple presentations and pitch decks to social media templates, brochures, and annual business plans, and more.

If you prefer buying templates individually, be sure to check out GraphicRiver . It's part of Envato Market, a suite of creative marketplaces catering to various creative needs. 

Determine Your Market Size to Grow a Successful Business

Knowing your market size is an important part of developing your business strategy. In this article, we’ve shared tips that'll help you calculate the market size correctly. The only thing left to do now is to use these tips so you can grow a successful business. Good luck!

Market Sizing: What is the Size of Your Market?

In developing their professional business plans , companies of all sizes face the challenge of determining the size of their markets.

The “Industry Analysis” section is the component of your business plan in which you include this information.

To begin, companies must present the size of their “ relevant market ” in their plans. The relevant market equals the company’s sales if it were to capture 100% of its specific niche of the market. Conversely, stating that you were competing in the $1 trillion U.S. healthcare market, for example, is a telltale sign of a poorly reasoned business plan, as there is no company that could reap $1 trillion in healthcare sales. Defining and communicating a credible relevant market size is far more powerful than presenting generic industry figures.

The challenge that many firms face is their inability to size their relevant markets, particularly if they are competing in new or rapidly evolving markets. On one hand, the fact that the markets are new or evolving is the reason why there may be a large opportunity to establish them and become the market leader. Conversely, investors, shareholders and senior management are often skeptical to invest resources because, since the markets do not yet exist, the markets may be too small, or not really exist at all.

Growthink has encountered the challenge of sizing emerging markets numerous times and has developed a proprietary methodology to solve the problem. To begin, it is critical to understand why traditional market sizing methodologies are ill equipped to size emerging markets. To illustrate, if a research firm were to use traditional methods to size a mature market such as the coffee market in the United States, it would consider demographic trends (e.g., aging baby boomers), psycho graphic trends (e.g., increased health consciousness), past sales trends and consumption rates, price movements, competitor brand shares and new product development, and channels/retailers among others. However, conducting such an analysis for emerging markets presents a challenge as several of these factors (e.g., past sales, demographics of the customer when there are no current customers) don’t exist because the markets are presently untapped.

The methodology required to size these new markets requires two approaches. Each approach will yield a different approximation of the potential market size, and often the figures will work together to provide a solid foundation for the market’s potential. Growthink calls the first approach “peeling back the onion.” In this approach, we start with the generic market (e.g., the coffee market) that that company is trying to penetrate, and remove pieces of that market that it will not target. For instance, if the company created an ultra high-speed coffee maker that retailed for $600, it would initially reduce the market size by factors such as retail channels (e.g., mass marketers would not carry the product), demographic factors (lower income customers would not purchase the product), etc. By peeling back the generic market, you eventually will be left with only the relevant portion of it.

The second methodology requires assessing the market from several angles to approximate the potential market share, answering questions including:

Competitors: Who is competing for the customer that you will be serving; what is in their product pipeline; once you release a product/service, how long will it take them to enter the market, who else may enter the market, etc.

Customers: What are the demographics and psychographics of the customers you will be targeting; what products are they currently using to fulfill a similar need (substitute products); how are they currently purchasing these products; what is their degree of loyalty to current providers, etc.

Market Factors: What other factors exist that will influence the market size – government regulations; market consolidation in related markets, price changes for raw materials, etc.

Case Studies: What other markets have experienced with similar transformations and what were the customer adoption rates in those markets, etc.

While these methodologies are often more painstaking than traditional market research techniques, they can be the difference in determining whether your company has the next iPod or the next Edsel.

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What Is an Industry Size Business Plan?

An industry size business plan is necessary for budgeting and marketing, especially for those who will seek third-party financing. 3 min read updated on September 19, 2022

An industry size business plan is necessary for budgeting and marketing, especially for those who will seek third-party financing. Most venture capitalists want to know the potential size of the market for the businesses they're investing in. Ultimately, the size of the potential market for the products or services your business is offering determines the value of your business, and to most venture capitalists, the larger that market, the better.

TAM, or Total Available Market, refers to the maximum size of the market for a business's offerings, and it may include both people and revenue. SAM, or Served Available Market, refers to the segment of the TAM consisting of people who will be able to use the business's solution. The SAM will be the business's target market.

Market Size Presentation

The section of your business plan pertaining to market size can be presented in any number of ways. One of the easiest ways to do this is with a simple columnar format that outlines the TAM and SAM now and in five years. This will allow the investor to quickly determine the potential size of the market and its growth over the course of your business plan.

While sizing of the market is important, it is only a plan. The market size section of your business plan can only provide an educated guess at how large the available market will be. This is your opportunity to demonstrate your plans for a successful launch and continued growth.

Available Data and Statistics

Market sizing is largely based on trade association data and any other available statistics. Begin with verifiable base data, including government statistics when available. Cross-reference your information with alternative sources whenever possible. Make sure that your findings make sense.

You should also be specific. For example, you wouldn't want to say, "There are millions of properties in the world with pools, and if we take a small percentage of that, our business plan will work." Rather, keep the industry definition very narrow.

Your analysis will differ depending on whether or not you're dealing with a pre-existing market or a new market. If you're dealing with an existing product, there will be industry and market data available to you. If you're dealing with a new product , you may need to conduct market research, consult with potential customers, and go from there.

Determining Your Market Size

Determining your market size will help you make a clear distinction between two categories:

• Addressable market - the total revenue opportunity for your product or service
• Available market - the portion of the addressable market you can realistically compete with

If you don't have a firm grip on your market size, you'll put your business's success at risk, both in these early stages and through its life cycle.

Estimating Your Market Size

Market sizing will allow you to gain a sense of current market trends. It can help you uncover the drivers of demand, since movements or changes in the market tend to continue for a period of time. Furthermore, studying these trends can reveal whether there's another product on the way that could potentially affect your market size.

When estimating market size, the best place to start is to consider the problem you intend to solve and how much value your product or service will have to consumers. This is actually something many entrepreneurs tend to overlook because they become engrossed in the product they've developed and not its benefits to the audience.

To estimate your market size, follow these steps:

• Clearly define the customer you're targeting.
• Estimate how many customers you will be targeting.
• Figure out your penetration rate.
• Calculate both the volume and the value to your potential market size.
• Apply the data.

Determining Your Market Potential

It doesn't matter if you're seeking third-party financing or not. Understanding the potential for your market will help you in the following areas:

• Product development
• Organizational design
• Distribution
• Partnerships
• Employee skills

Beyond this, understanding your market potential will help you address more mundane issues, such as selecting a bank, hiring an account, or seeking legal counsel .

If you need help with your industry size business plan, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

Hire the top business lawyers and save up to 60% on legal fees

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• Business Plan for New Company
• IT Company Business Plan
• Creating a Business Plan
• How to Value a Company
• Business Plan Outline: Everything You Need To Know
• How to Evaluate a Startup
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What are market trends in a business plan?

Table of Contents

What are market trends?

Why do i need market trends in my business plan, how to keep up with market trends, what market trends to monitor frequently, customer behaviours, technological advances, industry regulations, how to write the market trends in your business plan, using countingup to streamline your business.

Market trends in a business plan are key pieces of information that share where your company sits in the wider picture of your industry. Your business plan should prove why your business is viable, show where you fit in the market and what customers you serve. Examining what the market looks like is a smart business move when starting out.

This article on market trends in a business plan will cover:

• What are market trends
• Why market trends are necessary in my business plan

Market trends are the direction changes of a specific industry and can be influenced by customer behaviours or developing technology. 

Take the mobile phone industry for example, as technology has improved over the last twenty years consumers have moved from bulky handsets to slimmer smartphones, that can do everything a computer can and more. Consumers have even gone back to the fashion of flip phones now that technology has allowed a bigger screen that can be folded to save space. This is a good example where both technology and customer demand has influenced the direction of the industry,

Acknowledging these trends when running a business ensures that you stay on the same path as the industry itself, moving with customer needs and adapting your business as the sector and technology evolve. Ignoring market trends in the long term could mean you are left behind by customers, as they may move to businesses that meet their needs more. 

Your market trend research should be part of wider market analysis in your business plan. Understanding where you fit in a sector and what separates your company from competitors will help you shape everything from your product to pricing and marketing plans.

It’s important to focus on trends in this process so you can understand what appeals to your target audience. By analysing the market landscape and trends, you will be able to serve your customers better. It will also feed into your marketing messaging and content creation strategy later on.

A market and trend analysis should be both quantitative (using numbers and statistics such as projections and financial forecasts) and qualitative (based on experience or observation). Trends will fit into both categories of research and you should be able to find data and non-numerical information to support your examination of trends when writing your business plan. 

It’s important to remember that a business plan is not set in stone. It can be a document that you regularly update to reflect changes in your industry and company.

Keeping pace in a fast-changing market is not easy – after all, you’ve got a business to run. Using social media and subscribing to relevant industry emails make it simpler to get the information you need. Doing this will allow you to stay on top of market trends to include in your initial business plan and for more long-term future planning. 

Follow influencers in your industry to see what they talk about and how they create content for the audience that you serve. This will give you an idea of what resonates with your target customers when it comes to content and the form of content the influencer tends to use (video, written blogs, imagery etc.).

Read relevant publications in your sector to find out what is making headlines. Magazines or online blogs that share up-to-date opinions and thought leadership (influential content) will help you stay on the pulse of what is currently important to the industry.

Reading detailed reports and research can be time-consuming but will give you a good overview of the industry’s current state and any new developments. You can then update your business plan to follow the trends that arise from any data you’ve seen. 

Some common areas will affect the running of your business, the trends in your business plan and the whole market landscape. Keeping on top of the following aspects and regularly checking in on them will ensure your business develops as the market does.

Your customer can make or break your business. If you don’t cater to their needs and wants, your business will not be on the radar of your target audience. 

Let’s take an example – if your target customer is under 45, and you primarily do business online, you will need to ensure your website is optimised for mobile. This is because consumer behaviours have changed in recent years, and most searches are now conducted via mobile . If you don’t pick up on this development, your business risks being left behind when competitors optimise for mobile and you don’t.

Like our previous example, customer behaviour often changes with advances in technology. As mobile phones, and then smartphones, have become more able to operate as a computer, consumers have moved to using their phones out of convenience. 

Keep on top of developments that are relevant to your business and make sure you can move with, and not against, the technology changes.

Every now and again, there will be a law change or new regulation that rocks many industries – such as GDPR in 2018. Staying up to date with regulations that could affect the way you run and market your business will save you weighty fines (especially in the case of data protection).

There may be more frequent regulation updates if you operate in an industry that requires you to follow safety guidelines or best practices, such as those that an electrician or builder will have to follow. 

Ensuring that you are up to date on precautions and rules, as well as renewing any professional certifications you need to operate, will ensure your business plan reflects the changing face of your industry.

Using your research on your target customers and the sector,  use the following steps to write up the market trends section of your business plan:

• Current market overview, including which company has the biggest share or most influence
• Where you fit in that market, what gives your business a competitive edge.
• Current trends that impact your business operation
• Any upcoming trends that may impact your business or the products/services you offer
• Outline any plans on how you will keep up with trends
• Upcoming regulatory changes

You can then follow this with your competitor research in your business plan, to give a full picture of your industry and where you fit in.

Now that you have the answers to questions like ‘what are market trends in a business plan’, you will be able to prepare a thorough market analysis to set up your new venture for success. 

Countingup can help your new business by making your business accounting simple, too. Countingup is the business account with built-in accounting software. The app is helping thousands of business owners across the UK save time and money by automating the time consuming parts of accounting. Find out more here and get started today.

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Redirect Notice

Format attachments.

You'll find several kinds of fields in your grant application forms - check boxes, dates, data entry fields, and attachments. This page provides guidance on attachments: documents that are prepared outside the grant application using whatever editing software you desire (e.g., Microsoft Word), converted to PDF format,  and then added or uploaded to your application. We require PDF format to preserve document formatting and a consistent reading experience for reviewers and staff.

We have very specific attachment formatting requirements. Failure to follow these requirements may lead to application errors upon submission or withdrawal of your application from funding consideration.

• We do not require a specific citation format.
• The use of "et al." in place of listing all authors of a publication is acceptable practice.
• Most style guides include format guidance for citations and all formats are acceptable.
• SciENcv , a tool to prepare biosketches for NIH and other agencies, uses a standard format used by the National Library of Medicine (see Citing Medicine ). If your organization does not already have a standard, you may want to consider this one.
• Remember to comply with our public access policy by including the PMC reference number (PMCID) when citing applicable papers that you author or that arise from your NIH-funded research.

Combining Information into a Single Attachment

• If you need to combine information from different sources into a single document prior to uploading, do not use “bundling” or “portfolio” features which combine multiple documents into a single file by providing links to the individual files.

Electronic Signatures

• Electronic signatures on PDF attachments within your application are not allowed.
• To adhere to policies requiring electronic signatures on PDF attachments (e.g., electronically-signed other support format pages), you can electronically sign the document and then “flatten” the PDF .
• Documents with signatures (e.g., letters of support) can be printed, signed, scanned and attached in PDF format.
• Save all document attachments with descriptive filenames of 50 characters or less (including spaces).
• Use unique filenames for all attachments in an application (or within a component of a multi-project application).
• Use any of the following characters: A-Z, a-z, 0-9, underscore, hyphen, space, period, parenthesis, curly braces, square brackets, tilde, exclamation point, comma, apostrophe, at sign, number sign, dollar sign, percent sign, plus sign, and equal sign.
• If including spaces, use one space (not two or more) between words or characters. Do not begin the filename with a space or include a space immediately before the .pdf extension.
• Avoid the use of ampersand (&) since it requires special formatting (i.e., &amp).
• Ensure file size is greater than 0 bytes - we cannot accept a 0 byte attachment.
• Keep attachment file size to 100 MB or less.

Flattened PDFs

A PDF that has fillable fields, electronic signatures, text boxes or images inserted, becomes layered with each of these elements representing a layer. The existence of these layers interferes with the handling of the documents in eRA systems. Consequently, PDF documents included in applications, progress reports, and other information collected in eRA Commons must be flattened. A flattened PDF is simply one in which all the layers are merged together into a single flat layer. Many simple PDFs are already flattened - all the information is contained in a single layer. Uploading a PDF that isn’t flattened may result in an eRA Commons error message. You will need to replace your PDF with a flattened version to complete the submission process.

Font (Size, Color, Type density) and Line Spacing

Adherence to font size, type density, line spacing, and text color requirements is necessary to ensure readability and fairness. Although font requirements apply to all attachments, they are most important and most heavily scrutinized in attachments with page limits.

Text in your attachments must follow these minimum requirements:

• Some PDF conversion software reduces font size. It is important to confirm that the final PDF document complies with the font requirements.
• Type density: Must be no more than 15 characters per linear inch (including characters and spaces).
• Line spacing: Must be no more than six lines per vertical inch.
• Text color: No restriction. Though not required, black or other high-contrast text colors are recommended since they print well and are legible to the largest audience.
• Palatino Linotype

Legibility is of paramount importance. Applications that include PDF attachments that do not conform to the minimum requirements listed above may be withdrawn from consideration.

Format Pages

• Some attachment instructions refer to required format pages (e.g., biosketch, other support, training data tables).

Headers and Footers

• Do not include headers or footers in your attachments. We add headers, footers, page numbers, bookmarks, and a table of contents when we assemble your grant application upon submission.
• Some funding opportunities and form instructions provide guidance on organizing the content of attachments including specific headings that must be included.

Hypertext, Hyperlinks, and URLs

• Refer to NOT-OD-20-174: Reminder: NIH Policy on Use of Hypertext in NIH Grant Applications .
• Hyperlinks and URLs are only allowed when specifically noted in funding opportunities and/or form field instructions. It is highly unusual for a funding opportunity to allow links in Specific Aims, Research Strategy, and other page-limited attachments.
• Hyperlinks and URLs may not be used to provide information necessary to application review. Applications must be self-contained and reflect the information available at time of review.
• Reviewers are not obligated to view linked sites and are cautioned that they should not directly access a website (unless the link to the site was specifically requested in application instructions) as it could compromise their anonymity.
• NIH ( http://www.nih.gov/ )
• http://www.nih.gov/

Figures (e.g., Images, Graphics, Charts, Graphs, and Tables)

• Images and other figures must be readable as printed on an 8.5” x 11” page at normal (100%) scale.
• Figures should be included in the Research Strategy, Program Plan, or equivalent attachment and count towards page limits.
• Figures should not be included in the Specific Aims attachment. Figures can interfere with the NIH post-award process to categorize awards in RePORT .
• Unless otherwise stated in the funding opportunity, the Project Summary/Abstract and Project Narrative attachments should only include text (no figures). Figures can interfere with NIH post-award process to categorize awards in RePORT .
• Applicants should use image compression such as JPEG or PNG to reduce overall application file size.
• For advice on creating effective figures, refer to Tips for Tables, Charts, and Figures .
• Consider including Accessibility elements like structural headers and meaningful Alt Text in your figures to maximize visual and descriptive clarity for all readers.

Language and Style

• Use English. (See 2 CFR 200.111, English language .)
• Avoid jargon.
• Spell out acronyms the first time they are used in each application section or attachment. Note the appropriate abbreviation in parentheses. The abbreviation may be used in the section or attachment thereafter. Find a list of Abbreviations used in the NIH Grants Policy Statement.

Marking Up Attachments

• Do not markup your PDF documents with comments, sticky notes, or other features that are added on top of your PDF document content. This information may not be retained in your final application image.
• Do not use bracketing, indenting, highlighting, bolding, italicizing, underlining, margin lines, change in typography, font, or font color, or any other type of markup to identify changes in Resubmission Applications .

Orientation

• Both portrait and landscape attachments are accepted. However, keep in mind that landscape can be difficult to read online and may require reviewers and staff to scroll to see all available text.

Page Limits and Lines of Text Limits

• ​Page limits defined in a funding opportunity should be followed when different than those found in the Table of Page Limits . Page limits defined in a related NIH Guide notice should be followed if different than either the Table of Page Limits or the funding opportunity.
• ​If no page limit for an attachment is listed in either the Table of Page Limits, Section IV of the funding opportunity under Page Limitations, or in a related NIH Guide notice, you can assume the attachment does not have a limit.
• Some page limits apply to multiple attachments that when combined must stay within a designated limit. You may want to prepare your information in a single document to ensure you are within the page limit, then later break the information up into the various separate attachments. Our systems will accommodate a certain amount of white space resulting from splitting the information into the separate attachments when verifying compliance with a limit.
• We systematically check many page limit requirements and provide error or warning messages to minimize incomplete or non-compliant applications. These systematic checks may not address all page limit requirements for a specific opportunity and do not replace the checks done by staff after submission. You must comply with all documented page limits and should not rely solely on system validations.
• Page limits are strictly enforced to include all text included on the page including any headers. Limits measured in lines of text are not systematically enforced. In the case of the Project Summary/Abstract and Narrative attachments on the R&R Other Project Information form, we only systematically enforce egregious issues (text exceeds one page). Our manual checks would not remove an application from consideration if only the header information put the content over the specified line limit.
• When preparing an administrative supplement application, follow the Table of Page Limits using the activity code of the parent award and any additional limits specified in the funding opportunity or a related notice.
• Do not use the appendix or other sections of your application to circumvent page limits ( NOT-OD-11-080 ) .

Paper Size and Margins

• Use paper (page) size no larger than standard letter paper size (8 ½" x 11”) .
• Provide at least one-half inch margins ( ½" ) — top, bottom, left, and right — for all pages. No applicant-supplied information can appear in the margins.
• Avoid scanning text documents to produce the required PDFs. It is best to produce documents using your word processing software and then convert the documents to PDF. Scanning paper documents may hamper automated processing of your application for agency analysis and reporting.
• We recognize that sometimes scanning is necessary, especially when including letters of support or other signed documents on business letterhead.

Security Features

• Our systems must be able to open and edit your attached documents in order to generate your assembled application image for agency processing and funding consideration.
• Disable all security features in your PDF documents. Do not encrypt or password protect your documents. Using these features to protect your documents also prevents us from opening and processing them.

Single versus Multi-Column Page Format

• A single-column page format easily adapts to various screen sizes and is highly encouraged.
• Multi-column formats, especially for information spanning multiple pages, can be problematic for online review.
• Videos cannot be embedded in an application, but videos are accepted under limited circumstances as post-submission material. For additional guidance, check NOT-OD-24-067 .
• The cover letter submitted with the application must include information about the intent to submit a video. If this is not done, a video will not be accepted.
• Key images, “stills,” and a brief description of each video must be included within the page limits of the Research Strategy. Sufficient descriptive information must be provided within the Research Strategy to understand the information presented in the video, as not all reviewers may be able to access the video, depending on technological constraints.