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Note: Before I begin, I would like to clarify the dierence between market
potential and revenue estimate. I have often seen entrepreneurs use the two
terms interchangeably.
Market Potential
Market Potential is about estimating the size of the overall market opportunity.
It is a sum total of the potential revenues of all players who are addressing that
opportunity, if all the potential customers were to buy. I.e. If you were selling
aordable golf kits for rst-time golfers, then you could estimate market
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potential as follows (all numbers are indicative for illustration and do not
represent actual market) :
There are about 20 millon golfers across the top 10 golng markets in the
world. Additionally, about 100,000 new people take up golf every year across
the top 10 golng markets in the world.
About 25% of these nd the cost of golf kits expensive. If you take this as the
addressable market at USD 400 a kit for 5 million buyers, we are addressing a
USD 2 bn market opportunity, even if you look at only those who nd the
price of current golf kits too high.
Additionally, the high-quality at lower price value proposition is likely to
attract regular and casual golfers too i.e. 20 million golfers. This opens up a
USD 8 billion market among existing golfers. And thats a market growing at
15% pa.
However, given that most people who want to play golf do not take it up
because the current kits cost upwards of USD 1500, we believe that a USD 400
kit will explode the market and we would be able to encourage 10 times the
number of people to start playing golf. I.e. by redening the price-point, we
can create an additional market potential worth over USD 500 mn.
i.e. with an aordable and high-quality golf kit, we will be playing into a
market thats roughly USD 8 10 billion in the top 10 golng markets of the
world.
Revenue Estimate
Revenue estimate is about how much of this market potential do you plan to
target. Heres how you could think about it:
We intend to launch this product in Japan, the worlds largest and fastest-
growing golng market. There are 3 million active golfers in Japan and over
50,000 new golfers are added every year.
We believe that with an aordable golf kit, we could double the size of the
golf market in Japan.
In year one, we intend to attract 5000 customers, going to 20,000 customers
in year 2 and selling to 100,000 new and existing golfers in year 3. These will
be in the top 5 golng markets in Japan. In year 4, we intend to take the
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concept to US and Europe, with a target to sell over 500,000 kits in year 4,
across all markets we are present in.
Thus, our revenue estimate (at current prices) is USD 2 mn in year 1, USD 8
mn in year 2, USD 40 mn in year 3 and USD 200mn in year 4. (In comparison,
the leading golf kits brand is doing USD 2 bn in revenues currently)
Estimating the size of the market, and then predicting how much revenue the
startup can achieve and at what growth rate is indeed a tricky exercise. But
going wrong on this could either kill your company, or if in a rare case you have
underestimated your revenues, you may end up raising more capital than
necessary and thus diluting more equity at an early stage of the venture.
Many startups make the mistake of taking broad brush reports from large
consulting or research rms, and estimate the size of their market on the basis
of those reports. Often we hear entrepreneurs mention According to Gartner,
healthcare is a $80Bn industry with a 23% growth rate. Now, while this could
be broadly true, for an investor, and even for the startup, these gures have
little relevance. Heres why
In most market segments, the investors would be broadly aware of the scale
potential. At a startup stage, investors will most likely invite a startup for a
meeting only after they have assessed that the concept does address a large
market. Hence, stating the obvious, especially in segments that are very
obviously large does not add any value. E.g. For a startup in the education
sector, highlighting in minute details the number of schools, number of
students and growth rate in India is wasting precious time in the rst meeting
with investors. Assume that investors who are meeting a startup in the
education space know the potential of the opportunities in the domain.
Investors dont get any comfort from market estimated from industry research
data. They want entrepreneurs to build up their estimates based on their
insights and conviction on how their concept will alter the dynamics of the
market they wish to operate in.
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How then do you estimate the market potential?Simply by being specic about
your segment and making some assumptions on the specic segments and the
revenues per customer/consumer. E.g. If your concept is about premium home
tuition, instead of saying education in India is a $18 Bn market, it will be
prudent to state With over 250,000 students in the top 10 cities in schools with
fees above INR 10,000 a month, at INR 2500 per student, the market potential is
roughly over INR.500 INR.600Cr per annum. At an all-India level, the same
translates to a market potential of well over INR.1000 Cr.
Clearly dene what problem you are solving and for whom this will give
you a good idea of the number of customers with that problem in the
geographies that you plan to be available in.
Estimate the practical reach e.g. while there may be a 100,000 people in your
target audience spread across 50 cities, you may want to take the top 5 or top
10 cities and see how many people you have within your target audience. This
of course gives you the total market potential, if 100% of potential customers
were to buy.
Now, apply some lters i.e. ability to pay, ability to reach via media, etc. E.g.
while there may be 60,000 potential customers in the top 10 cities you
identied, and you may be planning to use a combination of media, if the
total reach of these media vehicles is 50%, the total potential of the market is
really 30,000 customers.
You could also apply some price lters to test the elasticity of the demand in
comparison to price. I.e. work up alternate scenarios to re0ect the increase /
decrease in demand in case the price were to be moved up or down; and then
evaluate which scenario makes a better business case. [Note: For dierent
situations you may have very dierent parameters for a good business case. In
some cases, rapidly acquiring customers, even if margins are lower, would be a
key criteria (often relevant in categories; it is important to achieve scale to be
relevant e.g. e-commerce lock in potential customers on whom protability
can be increased later)].
Now, if the product is of a repeat purchase nature, you would need to make
some assumptions on the number of times the customers would buy the
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All the above will need to be worked and reworked at dierent levels of
assumptions often to arrive at what seems like a practical market estimation.
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In your pitch deck do you talk about future markets that can be addressed by the product?
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