The Importance of Calculating Your Market Size
Tell me, do you actually know how big your market is?
If you’re about to quote some industry report or casually mention a number with “billion” at the end, I might need to take a deep breath. This isn’t a dig at you specifically, it’s a mistake I see constantly, but one that can absolutely tank your business.
When you don’t calculate your market size properly, it leads to fantasy planning rather than strategy. The results are predictably awful. You end up with wildly optimistic revenue projections. Your customer acquisition costs spiral because you’re targeting too broadly. And worst of all, you waste precious time and money chasing customers who were never going to buy from you anyway. Not exactly a recipe for success, is it?
I always tell founders to get obsessive about market sizing. Because when you truly understand your market size, everything else falls into place. Your messaging gets sharper. Your projections become believable. And you stop wasting resources on people who aren’t actually your customers. For those wanting to skip the manual calculations, you can use our market size calculator to get started quickly.
Clarifying What a Market or Niche Really Is
So, what’s your market? If you just said something like “women aged 25-45” or “fitness enthusiasts“, I’m already rolling my eyes. I’m not picking on you, this is frustratingly common, but this isn’t a market. It’s way too broad to be useful, and as a result, you’ll struggle with everything downstream.
When you don’t have a clear market definition, you end up with mushy, vague messaging that doesn’t actually resonate with anyone. It’s like shouting in a crowded room instead of having a conversation with someone specific. And we all know how that turns out.
I always push founders to zoom in until it hurts. A real market definition includes a specific pain point and desired outcome. For example,
- not “men interested in health“,
- but “men over 40 experiencing unexplained fatigue who want natural energy solutions without medication.”
See how that’s focused on what they’re trying to achieve, not just who they are demographically?
The Simple Framework for Market Size Calculation
Let’s get practical. The first approach is what I call the simple framework market size calculation. You don’t need fancy spreadsheets or detailed forecasts to get started, just a sharp question:
- How many people actually fit your specific market definition? And of those, what percentage can you realistically capture?
Rather than scribbling on a napkin, I go straight to the data. I look up real numbers and analyze specific traits to paint a more accurate picture.
Let’s say you’re launching an app for new parents dealing with sleep training. You’ll want to know not just how many new parents there are, but :
- How many are actively searching for sleep solutions, how many feel underserved by current options, and which regions you can effectively reach.
And that’s just the beginning. You then have to be brutally honest about your realistic market share. If you’re entering a crowded space with established competitors, you might only claim 2–5%. In less saturated markets, perhaps 5–10%. I almost never estimate higher than 10% in early-stage projections, because let’s face it, there’s always competition, even if it’s just inertia or DIY approaches. Not everyone with the problem will turn to your solution.
Estimate Your Market Size Like a Pro
Now let’s get to the structured approach. Most people love to throw around enormous TAM numbers in their pitch decks (I’ve seen “trillion-dollar markets” more times than I can count), but then completely neglect the more important figures that actually matter for their business today.
- Define Your Target Audience and TAM (Total Addressable Market)
Figure out exactly who has the problem you solve.
- TAM = Every single person who could possibly use what you’re selling.
- Example: If you’re launching a language learning app for business professionals, your TAM could be every working professional who needs to learn a second language for career advancement.
- Identify Your SAM (Serviceable Available Market)
Get real about who you can actually reach with your current resources.
- SAM = People you can actually serve based on your current capabilities.
- Example: If your app only teaches Spanish and French, and only works on iOS, your SAM is iOS-using professionals who need specifically those languages.
- Calculate Your SOM (Serviceable Obtainable Market)
This is the slice you can realistically win in the next 12-24 months.
- SOM = Your realistic piece of the pie, considering competition and resources.
- Example: iOS users who are dissatisfied with Duolingo and similar apps, actively looking for a more business-focused language solution.
Calculate Your Market Size Without the Fluff
Alright, now let’s get down to the actual calculation. And no, you don’t need an MBA or some fancy market research firm to do this properly. You need brutal honesty and basic math skills. That’s it.
Simple Formula:
Market size = Number of realistic customers × What they’ll actually spend
Here’s how to do it without fooling yourself:
- Start with people who actually want what you’re selling:
Not everyone in your demographic, just the ones with the specific problem you solve.
- Example: You sell specialized running shoes for people with flat feet. Don’t count all runners, focus on runners with flat feet who experience discomfort with standard shoes.
- Cut that number down based on reality:
Distribution limitations, geographic constraints, price sensitivity, all these factors shrink your actual market.
- Example: If you’re only selling online with no physical store presence, remove the percentage of customers who only buy shoes after trying them on.
- Be honest about revenue per customer:
What will they really spend, not what you hope they’ll spend.
- Example: If comparable specialty running shoes sell for $120 and customers replace them every 8 months, that’s about $180 per year per customer.
Let’s be real: Most founders inflate these numbers because it feels good. Don’t. Use hard data whenever possible and be conservative with your estimates. I’ve watched too many startups crash and burn because they believed their own hype about market size.
Markets evolve constantly, so this isn’t a one-and-done exercise. I make my clients revisit their market size calculations quarterly at minimum. What seemed unreachable last year might be within grasp now, and what looked like a massive opportunity might have shrunk due to new competitors.