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 it’s often used in pitch decks, strategy documents, and marketing plans, many businesses miscalculate it or rely on assumptions rather than evidence.

So, what is market size really? It refers to the total number of potential buyers for your product or service and the total possible revenue those buyers represent. Knowing your market size gives you a reality check. It helps you understand the scale of the opportunity, determine if your idea is commercially viable, and guide your product, pricing, and positioning decisions.

Getting it right can unlock better investment, clearer strategy, and a faster path to success. Getting it wrong can waste resources on a market that’s too small, too competitive, or doesn’t exist.

In this article, we’ll explain how to calculate your market size, the difference between total and serviceable markets, and how to use this metric to build smarter strategies. For more context, you can also explore our article on why market size is so important.

What Does Market Size Really Measure?

Market size is the total demand for your product or service within a specific market over a specific period—typically one year. It can be measured in two ways:

Volume: the number of units or customers in the market
Value: the total revenue potential based on price and buying frequency

While some definitions, like the one from Alexa, focus on the number of buyers, market size is more than just a headcount. It’s a commercial forecast—a way to estimate how much you can earn in a defined space, assuming no barriers to entry.

This estimate forms the foundation of business cases, go-to-market strategies, and budget planning, especially in early-stage or growth-phase ventures.

Why Accurate Market Sizing Drives Better Business Decisions

Understanding your market size isn’t just about getting funding—although that’s certainly one benefit. It underpins nearly every aspect of strategic planning. Here’s how:

Secure investment with confidence
Investors want to back companies that can scale. Demonstrating a well-defined and sizable market shows that your opportunity is real and backed by data—not hype.
Build stronger business strategies
Market size informs your go-to-market strategy, pricing model, and growth forecast. It defines the playing field and helps you identify the most profitable customer segments.
Plan for scalable hiring and operations
Whether you’re bootstrapping or scaling quickly, understanding your total market opportunity helps align team size, structure, and resource allocation.
Maximize R&D and marketing budgets
A clear understanding of your market prevents wasted spend. You can target high-opportunity areas with tailored solutions instead of building for segments that won’t deliver returns.
Avoid launching into saturated or unsustainable markets
Estimating your market size forces you to assess whether your product solves a real need, and whether that need exists in a profitable, reachable market.

Want to go deeper? Explore advanced market sizing techniques in our global calculation guide.

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How to Calculate Market Size Step by Step

There’s no one-size-fits-all method to calculate market size, but a structured approach will help you get a realistic estimate. Here’s how to calculate your market size in six essential steps:

Define your target market
Start by identifying who your product is for. Segment by demographics, geography, firmographics (for B2B), or behavior. This helps avoid bloating your market size estimate with irrelevant buyers.
Estimate the total number of potential customers
Use reliable data sources such as census information, industry reports, or tools like Statista, IBISWorld, and Google Trends. Your goal is to identify how many people or companies fit your target profile.
Understand buying frequency
How often will a typical customer make a purchase in a year? This affects whether your market size is a one-time opportunity or a recurring revenue stream.
Determine average transaction value
Estimate how much each customer will spend per transaction. Use your own price point or market averages from competitors.
Run the basic market size calculation
Multiply:

Number of potential customers × Average transaction value × Purchase frequency = Annual market size

Validate your assumptions with market research
Test your assumptions using qualitative and quantitative methods. Concept testing, customer interviews, or survey panels can all help validate if the demand you’re projecting is real.

If you need help structuring this data globally, see our guide to calculating market size internationally, which includes country-specific adjustments.

Is Your Market Size Big Enough to Justify Investment?

After calculating your market size, the next question is: is it large enough to support your growth goals?

There’s no universal benchmark, but in general:

Venture-backed startups often target markets of $1B+
Bootstrapped businesses or niche offerings may thrive in markets below $100M, provided margins and customer lifetime value are high

If your estimated market size falls under $100 million, that doesn’t mean the business isn’t viable—it just means you’ll need to sharpen your differentiation and focus on profitability early on.

Remember, your total market size isn’t 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: How Much of the Market Can You Realistically Reach?

Your total market size reflects the full revenue opportunity available—but only a portion of that is accessible to your business. That’s why it’s important to narrow your focus to your Serviceable Obtainable Market (SOM).

SOM refers to the slice of the market you can realistically reach, serve, and convert with your current resources, marketing, and distribution. It’s the most realistic view of your short- to mid-term opportunity.

Several factors shrink your SOM from your total addressable market:

Your marketing reach and budget
Competitor activity
Regulatory constraints
Operational footprint
Customer acquisition strategy

Understanding your SOM helps set achievable growth targets and improves credibility with stakeholders.

For a deeper dive into how market share fits into this picture, visit our article on how to calculate market share.

That’s where the serviceable obtainable market (SOM) comes in. SOM refers to the portion of your market size that you can realistically reach—based on your marketing, distribution, and operational capacity.

So how do you calculate your SOM?

How to Calculate the Serviceable Obtainable Market (SOM)

Once you’ve estimated your total market size, the next step is to determine how much of that market you can realistically serve—this is your Serviceable Obtainable Market (SOM).

As Tx Zhuo of Karlin Ventures puts it, “If it’s 1 to 5 percent of the pie, you have a realistic plan.” That perspective underlines an essential truth: no business captures an entire market. Your SOM helps ground your growth expectations in operational reality. It considers the actual number of potential customers you can reach with your current capabilities—based on your budget, distribution, and marketing resources.

So, how do you calculate your SOM? According to early-stage investor Jared Sleeper, there are three core approaches: top-down, bottom-up, and value theory.

1. The Top-Down Approach

The top-down method starts with a broad industry estimate—often from market reports or analyst forecasts—and works downward by applying assumptions. For instance, if the global wireless headset market is valued at $2.5 billion, you might assume your region accounts for 10% of that. Then, perhaps your brand positioning appeals to 20% of those consumers. Multiply those percentages to estimate your potential share.

This approach is useful for understanding the overall opportunity, but it can be vague or misleading if the assumptions aren’t grounded in evidence. It’s best used in combination with more tailored methods.

2. The Bottom-Up Approach

The bottom-up method starts with your own product, pricing, and realistic sales capacity. It asks:

How many customers can you realistically reach (based on your marketing reach and distribution)?
What’s your average selling price or annual revenue per customer?

Your SOM is then calculated as:

SOM = [Reachable customers] × [Average sale value or revenue per customer]

This is often the most accurate method because it reflects your actual go-to-market conditions. It allows early-stage or niche businesses to make defensible projections, especially when pitching to investors or planning budgets.

3. The Value Theory Approach

The value theory approach considers the perceived value of your offering relative to alternatives. You estimate how much customers would be willing to pay for the added value your product delivers.

For example, if your SaaS tool replaces a $200/month manual process and saves users 10 hours of work, you might justify a price of $150/month. Multiply this by the number of customers likely to see that value and convert.

While less data-driven than the bottom-up method, this approach is helpful for positioning premium products or validating pricing strategies.

Combining Methods for a More Accurate SOM

Each of these methods has its strengths. Sleeper recommends blending bottom-up and value theory approaches, as they incorporate the realities of your business rather than relying solely on broad market forecasts.

By triangulating across multiple approaches, you can present a more robust estimate that balances ambition with credibility—essential when presenting to investors or internal stakeholders.

For a deeper view of this layered approach, see our full market sizing methodology guide, where we explain how to combine primary and secondary research for more accurate modeling.

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

Calculating your market size and SOM is an essential step in launching a product or scaling a business, but these metrics are just the beginning. Without understanding how much of the market you can reach—and compete for—your total market size becomes just a theoretical figure.

Effective market research helps turn these estimates into actionable strategies. At Kadence, we use a mix of qualitative and quantitative tools to help brands validate their assumptions and forecast demand across global markets.

If you’re launching a product, entering a new region, or building a business case, accurate market sizing is where it starts. We help brands go beyond assumptions to define real opportunity—backed by data, not guesswork.

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