The importance of market size and how to calculating market size

Market size is a term that gets thrown around a lot in the business world — but what does it actually mean, and why does it matter?

Despite being a fundamental concept, market size is often misunderstood. Confusion around what it really represents can lead to poor strategic decisions, missed opportunities, or wasted resources chasing markets that don’t exist.

As someone who’s worked with businesses across different stages — from startups to established enterprises — I’ve seen firsthand how accurately sizing your market can be a game-changer. It gives you a clearer path to growth, helps attract the right investors, and prevents you from investing in dead-end strategies.

In this article, we’ll unpack what market size actually is, how to calculate it properly, and how to distinguish it from related concepts like market share, TAM, SAM, and SOM — so you can make decisions based on real opportunity, not guesswork.

What is market size?

At its core, market size refers to the total number of potential buyers for your product or service. It’s a critical metric that helps businesses understand the commercial opportunity within a specific market.

One of the most common misconceptions about market size is confusing it with the overall population of a country or region. Just because a market has a large population doesn’t mean it’s the right fit. In fact, targeting a high-density market without enough alignment to your ideal customer profile can be a costly mistake. A smaller market with more qualified, interested buyers is often a better strategic choice.

Alexa defines market size as “the number of individuals in a certain market segment who are potential buyers.” That’s a useful starting point, but in practical terms, market size is more than just headcount — it’s typically measured as:

The total number of potential customers or sales within a defined period (usually a year), or
The total potential revenue your business could generate from that market in that time frame.

Understanding this figure sets the foundation for everything from product development to marketing, sales forecasting, and investment planning.

Why is market size important?

Understanding the size of your market — whether existing or new — is essential for making smart, strategic decisions.

If your sales growth is stagnating or has plateaued, market size might be the reason. There’s little point in continuing to invest heavily in a market where your target audience is shrinking or already saturated. On the flip side, entering a new market without knowing how many real potential buyers exist can lead to underperformance, missed targets, or a failed product launch — costing you time, money, and momentum.

When done properly, market sizing helps de-risk your decisions. It gives you a clear picture of the opportunity ahead and enables you to prioritise the markets that are most likely to deliver ROI.

It also plays a critical role in shaping:

Pricing and distribution strategies
Product-market fit validation
Marketing campaigns and positioning
Sales forecasting and capacity planning

In short, market size is more than a number — it’s the foundation for strategic planning, especially when growth, expansion, or investment is on the table.

Key Reasons to Understand Your Market Size

Attracting Investment
Market size is one of the first things investors look at. It shows the potential upside. If you can demonstrate a large, reachable, and growing market, you’re in a much better position to secure funding.
Building a Strong Go-to-Market Strategy
Knowing how many potential customers exist — and where — helps you define your positioning, messaging, and marketing mix with confidence.
Forecasting Budget and Headcount
Growth potential ties directly into resourcing. With solid market size data, you can make better decisions around budgeting, team structure, and scaling operations.
Maximising Your R&D Spend
When you understand who your customers are and how big the opportunity is, you can focus your product development on solving the right problems — for the right people — instead of building features no one needs.

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How to determine market size

So how do you actually figure out your market size? There are a number of ways to go about this:

Clearly identify the target market for your product or service
Carry out market research to assess the level of interest in what you’re offering — will people buy it?
Gather data on the number of potential customers and transactions per year. There are a number of secondary resources you can consult to help you do this.
Assess the total revenue generated in that segment of the economy in a given year

Is your market size too small?

So — you’ve calculated your market size, but what does that number mean? How do you know if your business is worth pursuing?

The answer depends very much on the market and the size of your business, but there are some good general guidelines. Usually, $100 million is on the lower end, and if your market size is smaller than this it may prove difficult to convince stakeholders or investors to get on board.

What is the serviceable obtainable market?

Determining your total market size is only the beginning, and this information alone isn’t worth much.

This is because you’ll never be able to reach literally every potential customer. There’s just no way. No business has the marketing tools, scale, and budget to reach every single person in their market.

And that’s without even mentioning competitors. You’ll never corner an entire market, and the most you can hope for is usually a small slice. According to Tx Zhuo of Karlin Ventures “If it’s 1 to 5 percent of the pie, you have a realistic plan.”

This is where we can turn to a useful metric called serviceable obtainable market (SOM). This refers to the potential customers (and potential revenue) you can realistically hope to reach with your marketing tools and budget.

So how can you calculate your SOM?

How to calculate the serviceable obtainable market

There are a number of ways to calculate your SOM. According to Jared Sleeper, an investor in early-stage companies, there are three main approaches you can take.

Top-down. This approach relies on the predictions, forecasts, and assumptions about your market from analysts like Gartner. It’s often based on conjecture and estimates to some extent. Think of statements like: “The wireless headset market is forecast to reach $2.5 billion by 2023”. It’s good for a general overview of the situation, but it’s a little vague and can be challenging to understand what proportion of the market you can realistically corner.

Bottom-up. This involves starting with your price and how many units you can realistically expect to sell. How many customers can you reach + how much is each sale = your SOM. It’s more tailored to your specific situation instead of just a broad assessment of the market as a whole, so in this sense, it’s a more reliable way to work out your SOM.

Value theory. This final strategy is a little less precise, but it still has some usefulness. It involves considering the value your product or service adds compared to alternatives and estimating how much customers would be prepared to pay for that extra value.

Sleeper recommends options 2 and 3 since they actually consider the specifics of your business and how you would interact with the market, as opposed to a general prediction. It may make sense to use a blend of all three approaches to gain the fullest picture of your SOM and provide as much insight as possible to your stakeholders or investors.

Calculating market size is an important step on the road to building a successful business or launching a new product or service. However, it’s only one step. The metric on its own isn’t worth a whole lot unless you can also show how much of that market you can reach and compete for.

Market research is a crucial part of determining your market size, SOM, and laying the foundations for a successful business. To find out how Kadence can help you with this, take a look at our market sizing services or get in touch with us today.