What Is Market Size?

Clarity over convention

The Sibyl Un-Glossary

Some terms have been defined in many places, yet misinterpretations of them keep appearing in decks. At Sibyl, we’re doing the un-glossary instead: starting with what a term is often mistaken for, then working toward what it actually means. We hope it helps.

Founders rarely get market size wrong because they cannot find a number.

It’s often wrong because founders measure the wrong thing.

1. Your sized the wrong industry

Suppose ecommerce generates $10 billion in annual revenue.

If your startup provides logistics for ecommerce companies, your market size is not $10 billion. Logistics may represent only 10% – 20% of ecommerce spending, making the relevant layer closer to $1 – $2 billion.

Now suppose you provide software that optimizes those logistics operations.

Your market is not the full logistics layer either. It is the amount logistics companies could realistically spend on optimization software.

Your calculation might look like this:

$10 billion in ecommerce revenue

× 15% spent on logistics

× 3% spent on optimization software

= $45 million annual market size

The exact percentages are debatable. The logic should not be.

The question is not:

How large is the industry around us?

It is:

How much of that spending could realistically become revenue for companies like ours?

2. You sized the number of potenial customers

Suppose 100 million adults in the United States might order food online.

That is not a market size. It is a potential customer population.

To calculate market size, you need to translate those customers into annual revenue:

Potential customers × purchases per year × revenue per purchase

For example:

100 million customers
× 10 orders per year
× $30 per order
= $30 billion in annual food orders

But even that may not be the relevant market size of the company.

If a platform keeps only 20% of each order through commissions and delivery fees, the addressable revenue opportunity is closer to $6 billion.

The value of the transactions passing through a market is not always the revenue available to the companies serving it.

3. Market size is an annual number

Market size normally represents the revenue opportunity over one year.

That means 365 days.

Not one month.

Not six months.

Not the total revenue expected over the next five years.

If 500,000 customers spend $50 per month, the market size is not $25 million.

It is:

500,000 × $50 × 12 = $300 million per year

Similarly, adding together five years of projected spending does not give you the market size. It gives you five years of cumulative spending.

The current market size and the projected future market size should be shown separately.

How wrong is too wrong?

No market size estimate is perfectly accurate.

Even professional analysts won’t get too hung up on a number the have put out there to the dot because people use slightly different data sources and assumptions.

Being +/-10% off is usually irrelevant.

Being 50% off may raise an eyebrow, especially for somebody who knows the industry well.

Being 10x off makes the reader wonder whether you understand the economics of your own business and if you are grounded on reality.

The market-size calculation is not really a test of precision. It is a test of whether you understand what the big picture entails.

A good way to get a grounding from a quoted number would be to take that public # and see if you can break it down to who pays for it , how frequently, and how much every time … and if your number can match the number on th public report by some reasonable margin (i.e. not 10x!) difference, then you’ve done what can be reasonbly be expected of you.

What it actually means

Market size

The total annual revenue opportunity available to all providers of a defined product or service within a specified customer segment, use case, and geography.