Market sizing survey: how to estimate the potential of a new market

Market sizing estimates the number of potential customers and the potential yearly revenue in a specific market. Businesses use this information before launching products or services, especially when entering a new market, seeking investors, or adjusting prices.

There are three main metrics that help define your market:

• Total addressable market (TAM): The total demand that could exist if your services reached every suitable customer.
• Serviceable available market (SAM): This is the portion of the TAM that fits your product, location, price range, and sales approach.
• Serviceable obtainable market (SOM): This is a realistic estimate of the revenue your business could actually earn in a certain period.

In short, TAM shows the overall opportunity, SAM shows what’s relevant to you, and SOM shows what’s realistically possible.

Published census data helps businesses determine how many people live in an area or estimate potential earnings based on prices. This is especially useful for offline businesses planning to open a new store or restaurant in a different city.

In addition to publicly available market information and secondary data, a market sizing survey helps you identify the problems customers face, how they solve them now, and the resources they use. It also shows how these resources are priced, how often people buy them, and what makes current solutions stand out compared to your new business. Entrepreneur and educator Steve Blank captures the principle neatly: “There are no facts inside your building, so get outside.” In other words, internal opinions should be tested with real customers before they are included in a forecast.

There are two main ways to size a market: top-down and bottom-up. Using both methods usually gives you a more reliable estimate than picking just one.

Top-down market sizing

Top-down market sizing begins with a big, published number and then narrows it down using filters.

For example, if a company wants to launch an online bookkeeping service for small retailers in a city, it would start with the total number of registered retail businesses. Then, it would narrow the list by parameters like location, shop size, number of employees, number of years in business, etc.

The formula to calculate the market size here is:

Potential customers = Total population × Share matching each relevant filter

Top-down research is quick and helpful in the early planning stages. Good sources are government datasets, trade groups, financial reports, and research firms. For example, The U.S. Census Bureau’s Census Business Builder demographic and economic data can help you study customers, industries, locations, and competitors.

Bottom-up sizing

Broad reports might define the market differently than your business does. For example, a “business software” report could include products, customers, or countries that you do not serve. Bottom-up market sizing, on the other hand, starts with the customers you can actually target and builds the estimate based on their likely spending.

The basic formula to calculate market size using this method is:

Annual market size = Number of potential customers × Average yearly purchases × Average price

It is usually more detailed because it uses assumptions that match your sales model. MIT’s Disciplined Entrepreneurship method connects top-down and bottom-up analysis through customer interviews and a clearly defined target market. The best market-sizing analysis uses top-down data as a cross-check and bottom-up data as the primary operating estimate.

In this section, let us look at the step-by-step process of using surveys to aid your market sizing process.

1. Define the market

Before you write market-sizing questions, clearly define your potential customers. Include details such as:

• Location and customer profile
• The problem or need being studied
• Expected price range and buying channel

Describing your market as “people who exercise” is too broad. Instead, “urban professionals aged 25–40 who attend paid fitness classes at least twice a month” is much easier to research and estimate.

2. Gather reliable secondary data

Start by figuring out how many people or businesses could realistically become your customers. You can use government data, industry reports, regulatory records, and company filings to help with this estimate. Look closely at each source before using its numbers. Check when the data was published, what market it covers, and what it actually measures. For example, revenue figures do not reflect the number of customers, and strong global growth does not always translate into demand in your city.

3. Choose the right survey respondents

Your survey sample should match the market you want to study. For example, if you send a survey about accounting software mostly to students, you might get many responses. But they won’t help you estimate the market you want to target.

Use screening questions to verify that respondents meet the criteria. A business survey might be filtered by industry, company size, job role, and purchasing responsibility. A consumer survey could be filtered by location, age group, recent behaviors, and category. Sample quality is just as important as sample size. The American Association for Public Opinion Research suggests ensuring your sample matches your target population and reporting any uncertainty rather than pretending your results are exact.

4. Ask behavior-based market sizing questions

Good survey questions focus on what people actually do. Here are some useful questions:

This includes answering the five Ws and 1H about the business category, the demographics, the gaps to be addressed, and the reasons and factors that make your business stand out from competitors.

Avoid leading questions like, “Would you buy this affordable and convenient product?” This kind of wording tells people how they should feel. The Pew Research Center recommends using clear, specific language, avoiding answer options that overlap, and limiting each question to one idea.

People often say they will buy something, but change their minds when it is time to pay. Check what people have bought recently, how much they usually spend, and what might stop them from buying. If price is important, test several price points instead of asking for just one.

5. Build low, expected, and high estimates

It’s a good idea to create three possible scenarios. The low estimate should show a cautious outcome, with weaker demand, fewer purchases, or a lower conversion rate. The expected estimate should use the assumptions that your survey results and market data support most. The high estimate can include stronger demand and better conversion, but it should still be realistic and not assume everything will go perfectly.

Keep track of the data and assumptions you use for each scenario. This makes it easier to explain, review, and update your calculations when you get new survey responses or real sales numbers.

Here are some of the common market sizing mistakes and pitfalls to avoid:

• Treating everyone as a customer does not always mean a big market. People should have the need, ability, access, and willingness to buy.
• Depending only on purchase intent. People often say they like an idea but never buy the product or service. Pay more attention to recent behavior, actual spending, product trials, pre-orders, and sales data.
• Using a convenient but irrelevant sample. Answers from friends, social media followers, or loyal customers might not reflect your real target market. Find people who fit your market definition and be clear about how you got your sample.