Sizing the market is a necessary task for business planning and budgeting for all startups. Those seeking investment from third parties want to be particularly diligent in this task, as VCs and angel investors need to know they are investing in a business with potentially large market size. To determine the market size for your startup, ask yourself the following four questions:
1. What problem are you solving?
Have an understanding of what problem you are solving for customers and the value that your product or service is providing them. The problem you solve for your customers should be real in that it should address a valid point. Sometimes, entrepreneurs are fixated with problems they believe are real, but customers don't see things the same way.
2. Who is your target customer?
Create a profile of your target customer by analyzing the behaviors of this customer. The process of determining the target customer for an innovative product is different from the process used in an established marketplace, which is based on pre-existing product categories. An innovative startup's product or service is potentially disruptive to the marketplace, which requires a more qualitative approach to determine the target customer. The purpose of this process is to ensure that your startup's technology capabilities are directed toward the most valuable customers for future growth.
3. What other vendors or products exist in your space?
Your answer should never be: "There are none." There are and you need to determine how your product is different. Ask yourself if it meets the needs of the people currently purchasing competing products in a way that will sway or tempt the purchase of your product instead? Determine what exactly you have to offer the consumers.
4. What is the estimate number of target customers?
Estimate the practical reach your product/service will have. While there may be 100,000 people in your target audience spread across 50 cities, you may want to take the top 10 cities and see how many people you have within your target audience. This of course gives you the total market potential if 100% of potential customers were to buy from you.