Max Zamkow

@MZamkow

Your market size calculation is wrong.

As an investor I look at slide decks almost every day, and while there’s tons of advice out there on how to make your deck more effective, there are almost none that talk about the single biggest error that practically every deck has. You are miscalculating your Market Size. Here’s how it goes:

We sell our product for $100, and there are 20 million people in the US who buy products like ours, so our market size is $100 x 20 million people = $2 billion

THIS IS WRONG. The math itself is fine, but what you’re calculating isn’t Market Size. Instead what you’re calculating is your Total Potential Revenue.

Total Potential Revenue is the amount of money that you would make if every single potential customer bought your product. To put it another way, it’s how much money you’d make if you obtained 100% market share. While a good number to know, this is not the same as your market size.

Market Size is something different. Market Size is the amount of money that is currently being spent on products similar to yours. If you’re making a dog toy, your market size is the total amount of money spent on dog toys last year. If you’re making a B2B SAAS sales platform, it’s the total amount of money that companies spent on sales software last year.

Total Potential Revenue is the maximum amount of money you could make if you totally blew your competitors out of the water. Market Size is how much money your competition is making right now, before you’ve even entered the field.

Get it!?!?

Now these two numbers aren’t totally independent, and it’s important to understand how they relate to each other and their implications. If the ratio between these two numbers is too far off you’re signaling to investors that you don’t really understand the market you’re entering. The most common situations I see are:

  1. Total Potential Revenue > Market Size.
  2. Total Potential Revenue > half of the Market Size

Having a Total Potential Revenue greater than the Market Size is a big red flag for investors. What you’re claiming is that your company will make more money than the total amount that all of your competitors made, combined. The only way this is possible is if you’re able to:

  1. Expand the market to include customers who’ve never bought a product like yours.
  2. Command a higher price.
  3. Totally decimate your competition.

You’ll need to do at least 2, and probably all 3. While not impossible, this is incredibly unlikely and as such will send all but the craziest investors running for the hills.

Having a Total Potential Revenue that is greater than half of the Market Size is a potential red flag. What you’re saying is that your product and ability to execute is so outstanding that you’re going to be able to obtain more than 50% market share. If you’re playing in a new market, maybe this is possible, but if you’re playing in a market with even halfway decent competition, no way José, kiss that investment goodbye.

Your Total Potential Revenue should be less than half of the Market Size, often way less. No matter how good you are, it’s incredibly unlikely that you’ll be able to obtain anywhere near half of the market. The iPhone only has 15.6% market share. Hell, The Internet is only just reaching 50% market share now.

from Mary Meeker’s Internet Trends 2018

“Alright” you say. “I get that Market Size is not the same as Total Potential Revenue and that my Total Potential Revenue should be much less than half my Market Size, but you haven’t told me the right way to calculate Market Size! Tell me how already!”

For most products it’s very easy to obtain the Market Size. All you have to do is… Google it. Yep, that’s right, Google it. Since Market Size calculations are important for people across finance there are a plethora of companies who spend all their time collecting data and writing reports on different industries. Ever wonder what a Market Research firm does!? Now you know, so all you have to do is find one that’s relevant to you. For example, here’s one for CRM software; here’s another for pet food. You’ll probably have to pay for a report containing your market size, but it’s well worth it. Not only will it help your personal understanding of the market, it’ll also prevent investors from dismissing your deck as unrealistic.

Now, unless your product is so novel that you’re truly creating an entirely new market and no reports exist, I strongly recommend that you don’t try to calculate Market Size yourself. The reason for this is that it’s the easiest thing in the world to fact check. All the investor has to do is Google it, so if the number that you calculate is different from what the easily Google-able reports say you’ll instantly lose the investor. Just pay the damn fee for the report, I know it feels like a waste but trust me it isn’t.

Ok, so for all the skimmers here’s the tl;dr summary. Your Market Size isn’t calculated by multiplying the price you sell your product for by the number of customers you think you can reach. Instead, to determine your Market Size search Google for a report from a market research firm. Now go fix your slide deck so it’s impossible for that potential investor to say no!

I’m a partner at Ugly Duckling Ventures, an early-stage firm investing in technologies that help Seniors, and an ambassador for Aging2.0 in NYC. If you’re working on something to make aging easier or happier I want to speak with you!

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