Investor Pitch: Bottoms Up Market Sizing
Continuing my mini-series on sizing the market for investors is the bottoms up approach, which is generally considered to be the most credible way for estimating existing demand for a product/solution. I like to use two types of bottoms up forecasting, which I describe as the total potential market and the total competitive sales approaches.
The total potential market approach is an easy way to get an idea of how big your product can be if you know who your target customers are and what your average selling price (ASP) is. Entrepreneurs need to be intellectually honest about what their sweet spot really is and how much their customers will actually pay, but once satisfied with these numbers the total market potential can be estimated by simply multiplying the number of customers in the target market by the ASP. For example, there are 13 million businesses in North America but only 8% of them have over $1M in annual revenue. If your product sells for $50K your total potential market is not $650 billion because you're probably not going to sell anything to 92% of companies with annual revenues below $1M. Zapdata by D&B is provides an accurate list of companies that is easily accessed, free (at least for the number of leads) and sortable based on common demographics such as location, sales, industry and number of employees. Zapdata provides lists for marketing purposes and I was skeptical at first that their numbers represented the number of contacts rather than the number of companies, but I've queried them directly about this numerous times and they assure me that the "leads" they describe do represent companies and not contacts.
The second part of measuring the market in this manner is the accuracy of the ASP. It is very hard to know what an ASP will actually be in sales situations but competitor price points do provide very strong data points. If no competition exists than estimating the savings or new revenue the product creates can help build the case for your ASP. Lastly, simply asking prospective customers what they would pay is another a great way to target an appropriate ASP.
Ultimately, the more specific the entrepreneur can be about the target customer, (nationwide, financial services with annual revenue from $50-$250M, etc.) and the more evidence provided that the price points are accurate, the more believable this type of total market potential approach will be.
The total competitive sales approach is highly credible when your goal is to build a better mouse trap, which replaces an existing product that has established sales numbers. This approach asks the question of "how much do people currently spend on the products that you intend to replace?" For example VOIP is a better way for consumers to make local and long distance phone calls. Thus, a credible way to size the market for VOIP would be to count up the revenues of landline phone competitors, discount it based on the savings that VOIP offers and then add this figure to the existing VOIP sales of Vonage, 8X8, Yahoo, Skype, etc.
If the competitive vendors are public than their revenues by product line are usually easy to come by in either SEC filings or analyst reports. Marketwatch and other financial news sources often will have the high level figures of total revenue for public companies. However, if more detail is required FreeEDGAR is a good option. Ironically, FreeEDGAR is not free but it is pretty cheap and 2 day access is only $9.95.
Sales data for private companies is much harder to come by without subscribing to D&B. D&B's website is terrible, it slows to a crawl and can never seem to access a new report when I'm pressed to meet a deadline. However, D&B does keep a massive database of private company revenue and if you prepare in advance their numerous website issues shouldn't be a significant barrier... but seriously, never count on D&B for anything last minute! Hoovers is another source of data but it is not as wide as D&B. D&B's Marketing Assistant Subscription is only $59.95 per month and it does not require an annual commitment. These numbers are self reported so their accuracy is not 100% because some companies will find in their interest to under or overstate their revenue. However, entrepreneurs who are competing against multiple competitors will find that the overall D&B data becomes incrementally more reliable as the pool of companies increases.
So many entrepreneurs rely only on Gartner's market research, which investors don't value highly, that performing a bottoms up market sizing is another small way that entrepreneurs can build personal credibility with the investors they are working with. At first performing a bottoms up market sizing can seem out of reach for bootstrapping entrepreneurs but the method I used costs less than $70.
See these earlier posts for more information on sizing the market for investors: