Understanding Market Size and Why It Matters

Market size is one of the most important concepts in business planning and market research—but also one of the most misunderstood. While the term appears frequently in pitch decks, strategy documents, and marketing plans, many brands either miscalculate it or rely on untested assumptions.

So, what is market size really? At its core, market size refers to the total number of potential buyers for your product or service, and the total possible revenue those buyers could generate. Understanding your market size provides a much-needed reality check. It helps you assess the true scale of the opportunity, determine whether your idea is commercially viable, and make informed decisions around product development, pricing strategy, and market positioning.

Getting it right can unlock better investment, sharper strategy, and a faster path to market success. Getting it wrong can mean wasting time, money, and resources on a market that’s too small, overly saturated, or fundamentally misaligned with your offer.

In this article, we break down how to calculate market size and why accurate market sizing should be at the heart of any business strategy. We also explore the difference between total, serviceable, and obtainable markets—and how to use these metrics to build realistic growth plans. If you’re looking for a deeper dive into advanced modeling, see our global market sizing guide.

How to Describe Market Size in Business Terms

In business, market size is typically expressed as the total addressable market (TAM). This includes all potential buyers within a defined market over a defined period—usually one year. Market size can be measured in:

Volume: the total number of potential customers or units sold
Value: the total potential revenue based on average price and purchase frequency
Buying frequency: how often a typical customer purchases per year

Describing market size this way gives businesses a clear, quantifiable view of the opportunity ahead. It enables better resource allocation, sharper targeting, and more credible investor pitches. For a more specific framework, you can read our guide on the top-down market sizing approach.

What Does Market Size Really Measure?

Market size isn’t just a number—it’s a commercial forecast. It answers the question: If there were no barriers to entry, how much revenue could we generate in this space?

Some sources define market size purely as the number of buyers, but this is limiting. A meaningful market sizing analysis also considers price points, consumption rates, geographic constraints, and channel access. It’s less about how many people exist in a segment and more about what they’re willing to spend, and how frequently.

That’s why market sizing forms the foundation of many business decisions, including product launches, geographic expansion, and investor funding rounds.

Why Accurate Market Sizing Drives Better Business Decisions

Understanding why market size is important goes beyond the pitch. It touches every part of strategic planning and operational execution. Here’s how:

Secure investment with confidence
Investors back scalable opportunities. Demonstrating a clearly defined market—sized with evidence—shows your business has growth potential. It turns your pitch into a business case.

Build stronger go-to-market strategies
Knowing how big your market is helps determine which customer segments to prioritize, which pricing models are feasible, and how aggressive your growth plan can be.

Align hiring and operations to growth
Whether you’re in startup mode or scaling a mature business, knowing your market size helps you plan the right team structure, hiring roadmap, and operational budget.

Avoid wasted spending
Too often, R&D and marketing budgets are blown chasing markets that can’t deliver ROI. Market sizing lets you focus spend on opportunities that are large enough—and realistic.

Stay out of saturated or unviable markets
Accurate market sizing forces a sober look at whether there’s a real, addressable demand for your offer. It’s the first filter before pouring money into a launch.

For a related analysis, see our guide to calculating market potential, which explains how to validate demand and ensure your assumptions hold up.

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How to Calculate Market Size Step by Step

There’s no universal method for calculating market size, but a structured, evidence-based process gives you a more accurate and defensible estimate. Whether you’re launching a product, entering a new region, or pitching to investors, knowing how to calculate market size is a critical early step. Here’s how to do it effectively.

Step 1: Define Your Target Market

Start by defining who your product or service is for. Avoid overestimating by being specific. Segment your audience by:

Demographics (age, income, gender)
Geography (region, city, country)
Firmographics (company size, industry—for B2B)
Behavior (usage patterns, purchase habits)

Clarity here avoids inflating your market size with irrelevant segments.

Step 2: Estimate the Total Number of Potential Customers

Use trusted secondary data sources like:

National census data
Government statistics offices
Industry reports such as Statista or IBISWorld
Trade associations
Google Trends

This step helps calculate how many individuals or organisations fall within your defined target market. That total becomes your potential buyer base.

Step 3: Understand Buying Frequency

Determine how often the average customer will make a purchase in a year. Is your product a one-time buy, a quarterly subscription, or something customers reorder frequently? This figure affects your total revenue projection and your customer lifetime value model.

Step 4: Determine Average Transaction Value

Estimate the price of your offering, or use market benchmarks. Depending on your business, you might choose to calculate:

Average order value (AOV)
Average annual revenue per customer
Contract size or subscription fee

Understanding pricing helps translate demand into financial terms.

Step 5: Use the Basic Market Size Formula

Market Size = Number of Potential Customers × Average Transaction Value × Purchase Frequency

This gives you your Total Addressable Market (TAM) in terms of annual revenue.

Example:
If your audience is 100,000 people, your product sells for £25, and they purchase four times a year, your market size is:

100,000 × £25 × 4 = £10,000,000 annually

Step 6: Validate Your Assumptions with Market Research

No model is complete without validation. Your inputs are only as good as your research. Use qualitative and quantitative methods—like surveys, in-depth interviews, and concept testing—to ensure the demand you’re projecting reflects reality.

For more complex international projects, see our global market sizing techniques to account for regional differences.

Is Your Market Size Big Enough?

Once you’ve calculated your total market size, you need to assess whether it’s large enough to support your business model and growth targets.

Here are some general benchmarks:

Venture-backed startups often seek markets over £800 million
Bootstrapped or niche businesses can thrive in smaller markets (e.g., £10–£100 million), especially with high-margin or repeat-purchase models

If your market size seems too small, revisit your pricing strategy or segmentation. Sometimes the real value lies in serving a more targeted segment exceptionally well. the only number that matters. Investors and stakeholders will also want to know how much of that market you can realistically serve, which brings us to the next metric.

From Market Size to SOM: What Can You Actually Reach?

Calculating market size shows the full opportunity—but that doesn’t mean you’ll capture it all. That’s where Serviceable Obtainable Market (SOM) comes in.

Your SOM represents the realistic portion of your market size that your brand can reach, serve, and convert given current capabilities. It reflects your distribution, marketing budget, operational footprint, and market competition.

Key factors that reduce your SOM:

Limited marketing or sales reach
Competitive saturation
Regulatory constraints
Budget for customer acquisition
Distribution and fulfilment channels

For context, explore our article on calculating market share to see how SOM fits into the bigger picture.

How to Calculate the Serviceable Obtainable Market (SOM)

Once you’ve defined your market size, the next step is narrowing down to SOM. Here are the three best approaches to estimate SOM—ideally used in combination.

1. Top-Down SOM Estimation

This method begins with a published industry-wide market figure (such as from Gartner, IBISWorld, or Statista) and applies a series of logical filters.

Example:

Total global market: £2 billion
Your target geography: 10% = £200 million
Your segment: 25% = £50 million
Projected share: 10% = £5 million

While this gives a broad sense of potential, its accuracy depends on realistic assumptions. Learn more in our top-down market sizing guide.

2. Bottom-Up SOM Estimation

This method builds from your internal data—marketing capacity, distribution coverage, and pricing.

SOM = Reachable Customers × Revenue Per Customer

If you can realistically reach 10,000 customers and each brings £200 per year, your SOM is £2 million. This method is more grounded in your actual capabilities and is preferred by investors for early-stage ventures.

3. Value Theory SOM Estimation

This approach estimates SOM based on perceived value and willingness to pay.

Example:
If your SaaS tool replaces a £250/month manual process, and customers value it at £180/month, multiply that by the number of prospects who would adopt it based on this value proposition.

Use this method when pricing is premium or when positioning is disruptive and not easily benchmarked.

Blend SOM Methods for More Accuracy

Each method offers strengths:

Top-down provides scale
Bottom-up gives credibility
Value theory captures pricing power

The best estimates triangulate all three—presenting a credible, growth-aligned figure. For deeper insight, refer to our guide to calculating market potential and learn how layered estimates lead to better forecasting.

SOM Is Not the End Goal—But It’s a Vital Step

Calculating your market size and narrowing it down to your Serviceable Obtainable Market (SOM) is a critical early step in building a successful business. These figures help you gauge commercial potential and determine where to focus your efforts—but they are not the final objective.

Market size tells you the scale of the opportunity. SOM shows what portion of that you can realistically capture. What truly matters is how you act on these insights. Without a clear strategy to convert opportunity into revenue, even the best estimates remain theoretical.

This is where high-quality market research makes the difference. At Kadence, we help brands move beyond assumptions with robust qualitative and quantitative research methods. From testing demand to refining positioning, our insights turn static models into strategic action.

If you’re preparing to launch a new product, expand into another region, or secure funding, accurate market size and SOM calculations are just the beginning. We’ll help you take the next step with confidence.

Submit a brief and we’ll show you how we can support your team with research that gives you confidence in every decision.

Frequently Asked Questions about Market Size

What is meant by market size?
Market size refers to the total potential demand for a product or service in a given market. It represents how many people or businesses could buy from you, and how much revenue they might generate.

How do you calculate market size?
Market size is calculated by multiplying the number of potential customers by the average transaction value and purchase frequency. This can be approached using top-down or bottom-up methods depending on data availability.

What is size market size?
This is a typo often seen in searches. The intended question is usually “What is market size?”—it means the estimated value or volume of a defined market over a specific period.

How do you describe the size of the market?
You describe it in terms of either value (total sales revenue potential) or volume (number of potential customers or units sold annually). Including both figures provides a comprehensive view.