Q: How To Estimate Prospect Counts and Market Sizes

Written by Sean Murphy. Posted in 1 Idea Stage, 2 Open for Business Stage, Funding, Rules of Thumb

Here are some back of the envelope models to estimate prospect counts and market sizes.

Q: I’m trying to determine the size of the market of “fine artists” or “creating artists” in the US (painters, sculptors etc.). The issue I have is the following: I’m able to find numbers of professional or semi-professional artists (artist that make money from their works and are somehow registered) but I don’t know how I can determine the number of “hobby-” or “amateur artists” that paint just for fun.

If the answer is 10,000 or 100,000 or 1 million artists how does that affect your strategy?

If they spend $10M or $100M or $1B in a year how does that affect your strategy?

If you are bootstrapping the question is who you can reach that will respond to your message or offer. That Share of Available Market (SAM) may be a small subset of the Total Available Market (TAM).

I normally see TAM/SAM defined by units per year or revenue per year not customer headcount, internal forecasts often uses unit counts but investors will want revenue per year.  Two critical variables that you will need to determine (or estimate) to calculate market size as annual revenue  are unit/transaction pricing (Average Selling Price) and average transaction frequency per customer.

TAM = (Average Selling Price) X (Average Customer Transactions Per Year) X Customers

If you have no data on competitive pricing, you need treat your price as a hypothesis and re-evaluate it periodically  (pricing is a process not a one time decision). At a minimum you should have a theory for how much value your offering will create for your customers and you can price to that while continuing to refine your understanding.

Transaction frequency also has to be estimated, for software this may take the form of an annual subscription which can simplify things a little. Some products have multi-year lifetimes (e.g. automobiles) and transactions per year will be a fraction (e.g. a 4 year lifetime would mean 0.25 transactions per year on average).

TAM is normally an investor question, how are you trying to use it to manage your business model hypotheses?

Q: You are correct I am getting asked this question by possible investors and want to have a defensible answer.

OK, here is a presentation you may find helpful:

MarketSizeFinal101102

More presentations from Sean Murphy

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