How to estimate market size

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.