Last time I wrote about market sizing it was on the ride share market. Then, May 2014, Uber was valued at $12 Billion. That was so 14 months ago. The recent valuation numbers show $50 billion and an article out yesterday says it will be $100 billion soon.
The way I showed the market sizing for Uber took a very generous share of world’s current spend on Taxi or Hired cars market. Uber, its investors and pundits do not see the addressable market for Uber as just the current spend. They definitely are not settling for the puny 5% CAGR (Cumulative Annual Growth Rate) of the taxi fare market. In general they seem to define the target addressable market (TAM) in terms of total miles driven – personal cars being the biggest of them and all other shared services. When you look at just miles travelled by cars in US alone it is 3.5 trillion miles. If Uber can monetize just 10 cents per mile, it is a $350 billion market.
Why stop with just people movers? If Uber can solve all logistics problems – people and things – the TAM explodes several times.
That kind of market sizing likely works for Uber. But can most of us in our business cases present a TAM that is as big a nation’s or world’s GDP? What is the right approach to market sizing without being Uber and not losing sight of opportunities to grow the TAM because we introduced a compelling new product?
It is one thing to make the vision and the overarching goal to be as extraordinary as possible. You want to organize world’s information (Google). You want to displace all passenger miles travelled with your ride service. You want to take 100% of the consumer spend (Apple). Boldness of the goal helps you see the market and the product in a completely different way. You build in scalability in your product and platform. You avoid solving a smaller problem. You energize your yourself and your team.
But the boldness of vision and defining as big a market you eventually want to address should not color how you view things in the first five to ten years. The market may be 15 trillion dollars but what slice of it is really serviceable by your product?
Here is a two step approach to sizing the market right to show a defensible business case and set realistic goals for your team.
- Start with the boldest vision possible but walk down to what is serviceable.The market may be 15 trillion dollars but what are the “leaks”? Think of it as market size waterfall.
Do not lose sight of the vision. But start applying reality filters for the next 10 years.
- Cut down the part that is not relevant to your product strategy.
- Remove the portion you do not want to get into because it is complex, not profitable, a trap, etc
- Trim the part where your product will never be a fit because of customer experience, alternatives or customer expectations.
- You can apply few more filters but you get the picture.
- What you are left with is the serviceable market. It may not be 50% of big vision as my example shows but it sets the floor.
- Now you walk up the market size staircase. You start by asking
- Why is the serviceable market low?
- What are the hurdles that led to the “waterfall”?
- What kind of product, form factor, ease of use etc will claw back some of the relevance and fit?
- What kind of business model innovation – subscription pricing? financing? revolutionary pricing? adding a third party to the value mix? – will help increase the serviceable market.
- Add that back, now you have a more meaningful opportunity.
What you have here is a defensible market size model. It did not lose sight of what is eventually possible. It applied the right filters to help you and your team succeed. And it helps you see the opportunities to clawback what you yielded and drive new growth. If you want to get even more rigorous you can do ranges with uncertainties (like scenario analysis). As long as your assumptions for each filter and each step is testable, your model is valid and will stand scrutiny.
This is market sizing for the rest of us.
Next I will talk about how to model your share of this market.