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5 Strategies to Effectively Determine Your Market Size By understanding market value, you can determine two things: the addressable market and the available market. Learn to outline the difference of each for your startup.

By Tx Zhuo

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Besides developing an exceptional product or hiring the right talent, doing some much-needed market research is the most critical step for any startup. A part of this research should involve market size. Without knowing your market size, you may be conducting business in a market so small, it's next to impossible to make any money.

Understanding market size helps you distinguish between two categories: the addressable market, which is the total revenue opportunity for your product or service; and the available market, which is the portion of the addressable market for which you can realistically compete. By outlining the difference between these two, you can develop a product offering to tackle that consumer sweet spot.

Related: Why Entrepreneurs Must Research Market Size

Without a solid grasp on your market size, you endanger your business' success in not only the early stages, but also throughout its entire life cycle.

Seeing the business horizon.

Market sizing gives you a sense of market trends. It can clue you in on the necessary drivers of demand, as market movements often continue in one direction or another for a period of time. What's more, those trends often indicate whether a substitute for your product is on the horizon that could potentially affect market size.

Take Kodak, for example. Prior to the late "90s, almost every picture in the U.S. was developed on Kodak film. Its name was synonymous with photography. But then digital broke big, and the number of digital cameras went from 4.5 million units in 2000 to 28.3 million units in 2007.

Instead of doubling down on digital photography, Kodak steadied its course, neglecting to look at what digital meant to both the addressable and available markets. As the addressable market dwindled, so did the available market, and the company's complacency led to the downfall of its brand.

Once you understand its importance, how exactly should you go about determining your market size?

1. Define your subsegment of the market.

Not even the largest, most established company has a 100 percent share of the market. In the case of Airbnb, its first big grab came from the shortage of hotel rooms during the 2007 Democratic National Convention. Zero in on your initial pool of customers, and make sure you have a handle on this group before you expand.

Related: 9 Questions to Ask When Assessing a Market

2. Conduct top-down market sizing.

Look at the total market for your product or service, and then establish a realistic estimate for your market share. Take, for example, the hospitality industry. U.S. travelers spent $23 billion on vacation rentals in 2012 -- if Marriott International accounted for $13.8 billion of that spend, it would probably be a stretch to count the remaining $9.2 billion as yours for the taking.

3. Follow with bottom-up analysis.

Determine where you'll sell your products, how many locations will stock them and how many comparable products typically sell. Try to be as objective as possible -- it'll help you figure out where realistic growth could take you in five years. Then, compare your numbers with the overall addressable market. If it's 1 to 5 percent of the pie, you have a realistic plan.

4. Look at the competition.

How crowded is your industry, and what types of companies are at the forefront? If, for instance, you were the only steel producer for a specific type of product, it'd be reasonable for you to get to a 50 percent market share. As a new airline in the travel industry, on the other hand, the likelihood of getting even a 10 percent market share is slim.

Related: 8 Strategies for Expanding a Niche Product Into New Markets

5. Assess the static market size.

Doing business in a static market comes with fierce competition. You and your competitors vie for the same pool of customers every year. Looking at hospitality again, a new hotel company must determine if the budget segment is growing faster than the luxury segment. This will inform how the long-term total addressable market size will likely change, which can help you respond to trends.

Being realistic about your projections is really the most important aspect of determining market size. That means staying objective and impartial about not just your product or service, but also about consumer need and want. Otherwise, you could find yourself doing business in a market too small to stay afloat.

Tx Zhuo

Managing partner at Karlin Ventures

 TX Zhuo is a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.

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