Market Size Formula

A framework for calculating market size and business potential, focusing on bottom-up analysis rather than top-down estimates.

Core Approach to Market Size Calculation

• Start with identifying your core customer segment
• Calculate average revenue per user/customer
• Multiply total addressable users by revenue per user
• Focus on realistic penetration rates (e.g., 20% of total market)

Example Calculation Structure

• Total addressable market: 500,000 potential users
• Realistic market capture: ~20% (100,000 users)
• Revenue per user: $100
• Potential annual revenue: $10,000,000

Key Considerations

• Don't rely on "what if everybody used this" thinking
• Use bottom-up analysis:
  • X users times Y value per user equals Z revenue
  • Must have clear formula for revenue generation
• Need to understand:
  • Exact customer profile
  • Realistic market penetration rates
  • Clear revenue model per customer

Common Pitfalls

• Focusing on total market size without considering:
  • Realistic capture rate
  • Actual customer willingness to pay
  • True serviceable market
• Not having clear revenue model before scaling
• Overestimating market penetration potential

Tips for Founders

• Have specific numbers ready for:
  • Customer acquisition cost
  • Lifetime value
  • Revenue per user
• Focus on core users who care most about solution
• Target top 1-9% of market initially rather than trying to serve everyone
• Build business model around most engaged users first

Based on advice from Shaan Puri and Sam Parr during startup pitches