Step 3: Size the market opportunity
Phase 1: Preliminary Research · Step 3 of 13
You need to know if this market is large enough to build a business in. Market size also tells you how analysts think about growth and who the major players are.
Article
Market sizing is one of the most misused exercises in business planning. Done poorly it becomes a fantasy spreadsheet where founders multiply large populations by optimistic price points to produce numbers that impress no one who has seen them before. Done well it becomes a discipline that forces you to understand the actual economics of your space.
There are two standard approaches to market sizing. Top-down starts with the total market and narrows to your segment. Bottom-up starts with the unit economics of a single sale and multiplies by the realistic number of customers you could serve. Neither is perfect. Together they create a useful range.
What matters more than the absolute number is the methodology. When an analyst says a market is worth fifty billion dollars you need to know whether that includes adjacent categories, whether it is measured by revenue or transaction volume, and whether the growth rate is organic or includes acquisitions. These details change the number dramatically.
Growth rate matters as much as size. A large static market means you are fighting incumbents for share. A growing market means new demand is being created and new entrants can capture that demand without taking it from someone else. The best markets for new businesses are large enough to matter and growing fast enough that incumbents cannot serve all the new demand.
Your output here is not just a number. It is a market size figure with full provenance: who calculated it, when, using what methodology, and what they included. This is the figure you will reference when you build your business case and eventually when you talk to investors.
Key Takeaways
- Why: Building in a shrinking market means fighting over a smaller pie every year.
- What: Use AI to find authoritative market size data with methodology and sources.
- Output: Total addressable market figure with source, growth rate, and confidence level.
AI Prompt
Act as a market research analyst. Based on this market definition: [paste your step 2 output here].
Provide the following:
- Total addressable market size in dollars with the methodology used to calculate it
- Annual growth rate with source and date
- The three most cited market sizing reports for this space with publication dates
- Any significant disagreements between analysts on market size and why they disagree
- The market size for the specific segment I am targeting if narrower than the total market
Flag any figures that may be outdated. Cite every source.