The Great Myth of Market Size (or it is THIS big)

It happens all the time. A presentation comes in via email or the presenter fires up the Power Point slides.  You get a slide that says: Market Size and then a big pie chart showing a worldwide opportunity of 6 billion cell phones.  Six Phreakin Billion Baby!  Now that's possibilities. At just a crummy 1% at one lousy buck (U.S. or Loonie) you have over half a billion bucks pouring into the bank. Sweet! Forget the term sheet, here is my ATM card, let's go get some cash.

<sigh>

Yes, this did happen last week.  It was for a mobile app that works on any phone and anywhere in the world, hence this billions of people opportunity.

Except for a pesky detail.  It was an application that specifically targeted women.  Further it was for English speaking women older than 40.  I want to respect the entrepreneur and his idea so I'll leave it there. 

The point I'm hopefully getting across is this:

Your market size is a reflection of the people who are likely to actually buy/use your product/service and not the entire installed base of whatever (in this case mobile phones sold in the world over a period of time).   In this case, shockingly, the actually potential customers was less than the 6 billion on the "Total Market Size" slide.

(I know, blogging has been slow, I've been playing business plan catch up, sorry)

Comments

[Terry Smith]

Given a realistic market size, what percentages do you usually look for minimally for it to be a worthy opportunity? Or better yet, VCs talk about a company that can potentially make $x in 3 to 5 years annually, is the customer count important here or more just the revenue?

Thanks.

[Terry Smith]

Given a realistic market size, what percentages do you usually look for minimally for it to be a worthy opportunity? Or better yet, VCs talk about a company that can potentially make $x in 3 to 5 years annually, is the customer count important here or more just the revenue?

Thanks.

[rick segal]

Terry (and Terry),

Thanks for stopping by. I don't have absolutes with respect to market share, etc, because it is going to vary between business opportunities. The customer count is going to matter to the extent they drive revenue as individuals. For example, page views, uniques, etc, are what drives blog networks. Raw monthly paying customers are what drive a service based offering to retail consumers. Lame answer, sorry, but it really is going to be different for every situation. My point here is to not get nuts trying to claim the entire world is your potential customer feeding ground.

Thanks for stopping by.

>R<

[Martin Edic (Techrigy)]

Market sizing is tricky thing. My experience lately has been the opposite problem from the example you describe. When I started with the company the focus was on selling to marketing/PR/advertising agencies. That looked like a limited market until I realized that even a small agency works with dozens of products or brands (we're a social media monitoring app). So the market suddenly looked a lot bigger.
Then we started selling to brand owners who want to keep the monitoring function in-house. Now the market becomes a 'how many brands are there out there?' question. The answer is a lot. But it gets better.
We added customers who monitor the reputations of influential people. Now the market adds personal brands to the mix. Yikes.
So the question is, how do I size this market to a potential investor without sounding like I'm exaggerating?

[Terry Smith]

Martin: I had a similar problem with my company and have asked the same question. The answer I got back was that nobody will believe you're exaggerating if you provide a reasonable justification for the market size from credible sources. More importantly than market size is the size of the initial or niche market you want to capture in 3 to 5 years.

Rick's problem here sounds like the market size wasn't justified. If they had said "We intend to expand our offering with x, y, and z services to cater to the rest of the market", it probably wouldn't have been met with so much criticism.

Hope this helps.

[rick segal]

Martin/Terry,
The issue is one of justification, that is totally correct. I'm good with game changing lives, I just want the understanding/facts, etc.

>R<