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How to estimate market size March 16, 2011

Posted by jeremyliew in startups, VC.
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As an entrepreneur, your time is a very valuable asset. It takes as much time and effort to build a business whether you’re attacking a small market or a big one. But the rewards for success in a big market are much greater, so it makes sense to attack big markets.

For the same reason,VCs are often very focused on market size. But there is is a lot of confusion about how to estimate market size. While you might play in a big industry, it is the Total Addressable Market size (TAM) that is really important.

TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business. This is often radically different from what an analyst report estimates as market size as their view of the “market” can be quite different from what your product can address. Here is an excellent analysis from VigLink of their TAM:

Viglink allows publishers to put commerce links into their content with a universal affiliate code, and then tracks sales that originate from those links and pays out the affiliate fee. As you can see above, they have done a really nice job of starting with an enormous “market size” ($600bn+ ecommerce market) and broken it down into what is addressable by them, the network payout piece of commissions coming from affiliate orginated ecommerce transactions, which is still a $1b+ opportunity.

I’d urge other entrepreneurs to conduct similarly realistic analysis when they present market size estimates.

 

Comments»

1. Malvertising Affecting Big Brands; Live From Washington D.C.; Aggregate Knowledge Adds DMP Lite Version - March 16, 2011

[…] Entrepreneur? Need to calculate the addressable market size for your latest and greatest idea? On the Lightspeed Venture blog, LSVP's Jeremy Liew gives a few pointers. Liew begins, "[Total Addressable Market] TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business." And then he provides a recent example on TAM from affiliate linker VigLink. Read more. […]

2. Ryan Born - March 17, 2011

Well done Jeremy! Thanks for sharing and great visual by the Viglink folks

3. Ouriel Ohayon - March 17, 2011

Jeremy how do you estimate a market when it is as its early stage? Search advertising 10 years ago, App market 2 years ago,….

There are TAMs that can t be put on paper. Other indicators have to be used.

4. Weekend Reading - March 18, 2011

[…] How to estimate market size: by Jeremy Liew. “TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business.” […]

5. $600bn or $1bn « Management Briefs - March 20, 2011

[…] **Posted by jeremyliew in startups, VC Article […]

6. Rajesh Jain’s Recommended Reading – 17 | CEOMAG - March 21, 2011

[…] How to estimate market size: by Jeremy Liew. “TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business.” […]

7. Ryan S. Arnold (@RyanSArnold) - September 27, 2011

What is this program that they used for the visual piece? Great description of how to go about it, and I would also like to take the information and make it into a graphic like this. Suggestions?

Mozenique - May 12, 2012

M.F Van Wyk

hi Ryan, if you have had any further insight into that could you also plz share it with me

contact details: chmximports@gmail.com

kind regards

8. Omar - November 30, 2011

I seemed to have completely missed where the explanation is on how to estimate market size?


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