Ultimate Guide to Evaluating Your Startup. Part 5: Market

Congrats! We're on the final stretch now. Today, we wrap up our evaluation marathon, so if you've missed some earlier articles, this is the best time to catch up. Follow the links below to jump to the parts that interest you:

Why market evaluation is important?

The first and maybe the most important question we're trying to figure out with market evaluation research is whether or not the market is worth it. For instance, if the market is rather small and covered with competitors, it may cost a lot to enter it, while the return won't be satisfying.

If the opportunities for your business are rather sunny, the research will bring you additional benefits:

  • More successful marketing campaigns – knowing your audiences and market specifics will help you design campaigns more precisely and effectively.
  • Deeper understanding of the competition – knowing your rivals is as valuable as knowing your clients. Thus, you'll be able to fine tune your strategy to stay ahead of competitors.
  • Wider opportunities – conducting in-depth research will help you detect new trends, new potential audiences, and new areas for expansion.

Now that it’s clear why we need it, let's explore some of the most important metrics.

The size of a market

market sizing

The first and very important step in defining your market size is defining what your market actually is. Start with the following questions:

  1. Who’s your buyer?
  2. Who’s your user? (yep, user is not always the same as a buyer)
  3. What is the scope of your market? (geography and demographics)

For example, if you create educational software for children, kids are your users, but their parents are those who actually buy your solution (buyers). At the same time, your potential audience is limited by age (teenagers may not be interested in your methodology) and geography (language of your app).

Bottom-Up and Top-Down Market Sizing

These are two most common methodologies to determine the size of your market.

Bottom-Up Market Sizing is like doing puzzle; you build a holistic view of your market by uniting separate pieces of information.

The formula is simple:

Number of Units * Price = Market Size

Let’s apply it to our example:

Number of Units

There are ca. 4.5mln children in Israel, and ca. 750 thousand of them are aged 5-9.

Average Price

An average URPU of mobile games in Israel is 48,66 (2019).

750000 children X $48,66= $36,5mln USD 

That's it.

Top-Down Market Sizing

Top-Down Market Sizing is more like sculpting. You take an already built vision of the market and remove irrelevant pieces.

For example, you've found data suggesting that the whole children's mobile game industry in Israel is a $160mln/year market. But not all mobile games are educational, right?

Through research you find that only 16% of games teach something. So, $160mln X 16% = $25,6 mln is your Top-Down Market Size estimate.

It's not a large market, but it’s not very small either. (Large markets are usually evaluated in billions of dollars). So, you may want to think twice before entering it. You can also consider adding more languages or features to expand your audience beyond age or geographical limitations, thus competing for a larger market.

Before moving forward, let's pay attention to a few nuances.

  • Number of Units is much trickier than our example. In many markets, people don't usually buy once a year, especially when they’re purchasing food or basic goods. In that case, you need to account for the average number of purchases per person per year to make the right calculations.
  • Pricing is another item to dig into. It's common for mobile apps to sell different subscription plans. With physical products, you may be producing models of different price segments. In that case, you need to split your market into separate income-based groups. Then, you can either create size evaluations for each of these groups or take the weighted average price for your calculation.


These abbreviations are hallmarks of market sizing, helping us estimate the whole picture of the market and understand our place in it. Let’s define them and apply them to our example.

PAM = Potential Addressable Market

PAM is rarely used, but we've decided to include it anyway; it's the ultimate guide, after all.

Another reason we’re including it is that the concept can help you dig up some good ideas on how to grow your reach or diversify your offer. Now, during the crisis, it's as helpful as never before. (We wrote about the importance of diversification in our recent whitepaper, “IT Business in Times of Global Crisis".)

PAM includes the world of clients that don't belong to your target audience at the moment but can potentially join it in the future. In our example, we are currently focused on the Israeli market, but if we translate the app to other languages, we can start targeting people from other countries. Additionally, we can add features for other age groups.

In other words, PAM is the most optimistic view of your future business. PAM is often presented to investors in the guise of TAM.

TAM = Total Addressable Market

TAM represents the most general understanding of market size. When people ask you “what’s the size of the market?” they usually mean TAM. In both of our top-down and bottom-up analyses, we've been calculating TAM.

To put it shortly, TAM is our target market not limited by our share and not expanded with future potential audiences.

Check out a related article:
The World After Corona: Covid-19 Effects on Global Economy and IT Sector

SAM = Serviceable Addressable Market

Reaching the entire TAM is something that founders see in their dreams. In reality, though, it's usually impossible. SAM stands for the market share we can actually cover with our distributor network, sales partners, online platforms, etc.

In the case of a children's app, we can cover only those who have appropriate gadgets and OS versions.

SOM = Serviceable and Obtainable Market (Market Share)

This is the part of the market we expect to capture based on our financial, sales, and marketing opportunities, competition, and ability to scale.

Size of Wallet and Share of Wallet

Size of wallet is the total amount an average client can spend on a certain group of products or services within a given period of time. This indicator helps to understand the financial capabilities of your target audience and tells an investor how expensive your solution is in comparison to customers' willingness to pay for it.

Share of wallet is the amount an average customer would spend on your brand rather than your competitors'.

Share of Wallet vs. Market Share

Even though these are two different concepts, increasing the first may be the most efficient way to give a boost to the second.

Both of these metrics are focused on growing revenue from customers. Raising your market share is usually done by attracting new clients. Share of wallet, though, focuses on increasing revenue from existing clients by offering new products or solutions. This often helps in attracting new audiences, even those already captured by competitive brands.

We can take a recent event as an example: during the quarantine, many online shops and restaurants started serving home food. Thus, they've managed to earn more from loyal clients, who were willing to taste something more casual than restaurant dishes. They've also attracted new customers who didn't want to shop for food. In this way, they've increased both their share of wallet and share of market.


Whew...it has been a long run. We hope you've found our guide useful and enjoyable to read.

At Intersog, we are always happy to give our clients a hand and help them define optimal product/market fit as well as the technology stack they need to build the product. Feel free to contact us if you need a consultation or have any suggestions regarding the guide.

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