The Science of B2B Market Sizing

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Mastering B2B market sizing is a necessity for any company hoping to improve its strategy and decision making. In this post you’ll learn how to use the right applications, create a clear market definition, and identify the best opportunities for your company. 

B2B market sizing involves stimulating the potential dollar value of a market or a potential market opportunity. Due to the complexity of markets, these estimates are made via models that rely heavily on important underlying assumptions. As with any modeling, B2B market sizing is a science. It requires an understanding of a specific product/service and the markets being evaluated, which is then used to draw logical segments and sub-segments within the market that will make the estimates more manageable to address.

That said, the following guide will walk you through the basics of B2B market sizing and prepare you for properly identifying and targeting the most promising market opportunities for your business.

What are Common B2B Market Sizing Business Applications?

While investors use market size to value publicly traded companies, business can use it as a key data point for evaluating resource decisions, investments, and market opportunities.

B2B market sizing can play a significant role in many business decisions:

  • Estimating the potential value of introducing a new product or service to the market.
  • Evaluating the impact of introducing your product or services to a new geography or market segment.
  • Determining which product/service to invest development resources.
  • Prioritizing market segments to target.
  • Assessing staffing needs for a given segment.
  • Evaluating a partnership opportunity.
  • Evaluating an acquisition opportunity.

As you can see, there are many different applications for B2B market sizing with differing levels of requirements in terms of accuracy and specificity. When assessing a market opportunity, it is important to get a clear understanding of how this information will be used and what level of precision is necessary. This will dictate how you should go about figuring out how to estimate a market size.

The key is understanding what information is necessary to effectively guide your company’s strategy and decision-making and understanding the sensitivity of your analysis to these factors. Effectively gauging these factors will help you minimize the cost of putting together the opportunity assessment and also ensure that you are collecting enough data to adequately support your team’s decision-making.

In the next section, I will explain the four most commonly used measurements for market opportunity assessments and highlight the limitations and benefits of each of these measurements:

  1. Total Market Potential
  2. Total Addressable Market (often referred to as TAM)
  3. Segmented Addressable Market (often referred to as SAM)
  4. Expected Share of Addressable Market

Having a clear understanding of these different measurement types is key to scoping out a market opportunity assessment project, as you will learn the time requirements and accuracy levels vary significantly across the various measurement types.

4 Commonly Used B2B Market Sizing Measurements

Diagram-How-to-Think-About-a-Market

Assessing a B2B market opportunity can be a daunting task. There are many different approaches to B2B market sizing and many different data points that you can use to inform your assessment. Below is an overview of the four most common data points relied upon for a B2B market opportunity assessment.

1) Total Market Potential

This is the potential sales value of a particular product or service within a specific target segment over a specified time frame. This calculation assumes that all opportunities within a given target segment are there for the taking and would be taken if they were available. Total market potential is calculated as the number of opportunities times the average selling price of these opportunities. It is important to evaluate whether or not the selling price is correlated or inversely correlated with a specific sub-segment of the B2B market opportunity that is being estimated.

Total Market Potential = (# of Opportunities) x (Average Selling Price of Opportunities) 

This statistic can be calculated very quickly, but it is only a ballpark figure. It can be useful for quickly understanding the potential for a B2B market opportunity in terms of magnitude.

2) Total Addressable Market (TAM)

This is the potential sales value of a specific target segment over a specified time frame that takes into consideration the available demand for a particular service or product. Total addressable market is calculated as the number of “targetable opportunities” times the average selling price of these opportunities. Targetable opportunities can be estimated via a market research survey or an assessment of current market penetration. It is best to do this calculation at a segment by segment level. Just as with total market potential, it is important to evaluate whether or not the selling price is correlated or inversely correlated with a specific sub-segment of the market opportunity that is being estimated.

TAM = (# Targetable Opportunities) x (Average Selling Price of Opportunities)

This statistic can also be estimated rather quickly and it provides a more realistic view of the potential value of a particular B2B market opportunity or segment. It can be useful for getting a more in-depth understanding of the potential value of an opportunity, but it is still just an estimate.

3) Segmented Addressable Market (SAM)

This is the potential sales value of a specific target segment over a specified time frame that is limited to available demand for a particular service or product that can be addressed via a specific business model and strategy. Segmented Addressable Market is calculated as the number of opportunities that will be targeted as part of the business model times the average selling price of these opportunities. The segment or business model addressable opportunities can be estimated via more targeted market research.

SAM = (# Opportunities Targeted as Part of Business Model)  x (Average Selling Price of Opportunities)

Calculating this statistic requires a more involved process, as you have to understand what percentage of the market would be addressable via your business model. This statistic provides a more accurate estimate of actual revenue potential of a market or segment than the total market potential or total addressable market statistics.

4) Expected Share of Addressable Market

This is the portion of the segmented addressable market sales value expected to be won, due to a given produce or service, over a specified time frame. The portion that is addressable is usually determined via a survey or some other form of market research that allows a company to predict the percentage of a given segment that they can expect to win in a given market. This is calculated as the expected win rate times the segmented addressable market. The win rate can generally be proxied by win rates in other similar segments or via a market research survey.

(Expected Win Rate) x (Segmented Addressable Market)

Calculating this data point requires a more involved process, as you have to estimate your company’s expected win rates within a given market or segment.  This statistic provides the most accurate estimate of actual revenue potential of a market or segment.

Now that you know the most common data points for assessing a B2B market opportunity, you are ready to start thinking about which is the most fitting for your needs. Read on to learn difference between top down and bottom up B2B market sizing approaches.

Top-Down Market Sizing vs Bottoms-Up Market Sizing

Bottoms-Up vs. Top-Down Market Sizing Diagram

Bottoms-Up Market Sizing Approach

This is the micro perspective to market sizing. The market is constructed using basic fundamentals you know about the company’s opportunity and/or resource limitations based on actual customer data or market data. Sometimes, this data comes through secondary sources like market analysts. Other times, it comes via conversations with customers or survey data on a specific market. Some examples of the bottoms-up approach include:

  • Building a complete list of all potential opportunities within a given target market. Explorics offers a great calculator for setting this up.
  • Reconstructing a market based on company records of market and penetration into space. This only works in a space mostly served by public companies that report your target market as a specific breakout segment. It is usually not an option because it requires key players in space to be publicly traded companies and their revenue reporting segments to be in line with the market that you are evaluating.
  • Revenue forecasting based on current market statistics and how more manpower can aid the marketing and sales efforts over a couple of specific time frames. This approach is intended to get at estimate of the expected addressable share of the market. Refer to Guy Kawasaki’s The Art of the Start for an example on how this methodology works.

Top-Down Market Sizing Approach

This method of estimating a market size starts with a macro outlook on the market and then boils it down to what is addressable during a specified time period.  This approach is typically used for estimating the total potential market opportunity. However, it can lead to misleading results when used to calculate addressable market sizes. These estimates generally rely on critical assumptions about expected win rate, average selling price, consumer adoption pace estimates, and addressable market definition. Consequently, these types of approaches tend to be less accurate and over-estimated.

In the event you are looking at a new technology market, you must consider the trend in market adoption. This often require an important assumption about technology adoption that can drastically affect a market size. It also requires interviews or survey data to support these estimates. For more established markets, this can generally be estimated by historical market adoption estimates for a given type of technology, product, or service.

There are lots of different ways to do this, and below are a few common approaches utilized:

  • Using census data to estimate the number of opportunities in a given market.
  • Using LinkedIn search statistics to estimate potential number of companies in a specific target market.
  • Estimating total market potential based on keyword traffic and number of unique searches. See Rob Walling’s post on this for more information on how to use this approach.

The key to these two approaches is identifying the input variables that have the largest influence over your market size estimates. Then, you can test the range of potential sizes given the most conservative and aggressive scenarios. This will tell you how much market validation is required in order to have sufficient confidence in the results of your model.

Top-down market size estimates arbitrarily assume a business will be able to capture some percentage of the market and generally do so on sparse data. That makes them over-stated, especially in less developed markets where the pace of technology adoption is not clear. Thus, it is important to realize that using a top-down approach comes with some real negatives. However, it can help make estimates quickly, and this can prove very useful for certain applications (i.e. sizing up relative market opportunities to target). The key is just realizing the weaknesses and accounting for them through interpreting your estimates and validating key assumptions about the market via market research.

Developing a Clear Market Definition

Target Market Opportunity Diagram

What is a market definition?

A market definition is a series of externally identifiable characteristics that identify the group of companies who would likely have a need for your product and could reasonably be expected to consider purchasing your product/service or a competitor’s product/service within a given time frame.

What is a market opportunity?

First and foremost, it is important to establish what is meant y a market opportunity. A market opportunity is the expected return that a company will generate from going after a specific market or set of markets during a given time frame and amount of resources.

Why is it necessary to have a clear market definition?

Only addressable markets are actual opportunities and you need to have a clear market definition that draws a line between those that are addressable and those that are not during a specific time frame. Otherwise, the market sizes are not grounded in reality and will be more misleading than helpful in business decisions.

Sometimes what appears to be an addressable opportunity from a quick glance, may not actually be an opportunity at all. This can be the result of internal or external factors that may not be top of mind, but jump off the page when you think through a market opportunity. Other factors may not be as obvious like budget allocations, but can quickly rule out complete subsets of opportunities really quick.

6 Key Factors For Identifying a Market Opportunity

  • Relevant Good/Service: What product or service are you hoping to sell? You should only be looking at an opportunity for a single good or service at a time. If there are more than one product or service, then you should evaluate them as separate opportunities.
  • Costs: What is the minimum price that we can sell this product for? Having a need won’t lead to a deal if the company does not have a budget for it. Analyst firms and the government produce statistics on average percentage of budget costs can be good for getting a sense as to what are the minimum prospect requirements you need to be considering.
  • Minimum Viable Opportunity: What will it cost to develop and execute a go-to-market strategy into a segment? And consequently, what is the minimum accepted return from going after an opportunity?
  • Time Frame: What is the time frame you are looking at for this opportunity? And do you have any time prior to approaching this market to address any additional product needs or is this an opportunity you plan to address with the product as is? This is important in ruling out opportunities as many opportunities will have specific product integration requirements that will preclude you from addressing those markets immediately.
  • Opportunity Limitations: Are there other factors such as geography, certification requirements limiting our ability to sell our products or services to a specific group of opportunities?
  • Resources: What are the company’s financial and human resource limitations? These can both affect the addressability of specific markets, specifically if they have product development requirements or have unique sales or marketing channel requirements.

Not all prospects are equal. You may need to differentiate them in order to get an accurate assessment of need and addressability. To do so, you will need to develop a clear market definition.

Get Started with Detailed Guides to Each Approach

For more details on how to get started with market sizing, see my follow-up series, “8 B2B Market Sizing Approaches to Quickly Assess Market Opportunity”. This series of short step-by-step guides will teach you how to apply eight different B2B market sizing approaches to quickly assess the value of a given market.

Marketing Manager, Pricing Strategy