My basic approach to market sizing is this:
# of potential customers x average selling price = Total Addressable Market
Don’t know average selling price (aka ASP)? No problem. Then use economic value creation instead as an upper threshold for price.
Economic value creation is what it sounds like: amount of economic value that product crates for the customer vis-à-vis time savings, cost savings, new sales, productivity increases or whatever.
For example: Assuming the product actually works, Widget X should save the average customer $1,000/year due to feature A and boost revenue by $500/year through feature B. Ergot, the economic value of Widget X to a customer is $1,500/year.*
How much value you capture––ie the market value––of the value you create will depend on the business, but especially in the early days of fleshing out a startup idea, I find this to be a very useful proxy and upper threshold.
For back of the envelope calculations, I typically assume that I’ll be able to capture 1/2 of the value I create at the absolute maximum.
In my experience, customers are more willing to let you capture a higher proportion of new revenue (especially high margin revenue!) as opposed to cost savings. New revenue “feels” free whereas cost savings does not.
*If you’re really sophisticated, you might argue that value creation = incremental profit, but I find that most customers & business have a really hard time actually calculating incremental profit.
Also published on Medium.