Market analysis is a detailed assessment of the market and customers that your business targets with its products and services.
A compelling pitch deck not only showcases your business idea but also provides investors with a clear understanding of the market opportunity. In the market analysis section, your goal is to paint a vivid picture of your target market and its potential, substantiated by robust data and analysis.
In the words of Richard Dulude, Underscore VC Partner, “The market size slide is one of the most commonly wasted slides in a pitch deck”. This article will guide you on creating an impactful market analysis slide that addresses crucial investor questions.
Four steps to calculate your market size
1. Define Your Target Customers:
Begin by clearly identifying your target customers. Investors want to know who your product or service is designed for. Define the characteristics of your ideal customer, including demographics, buying behavior, and preferences.
2. Explain target market segments:
Investors are keen on understanding the scope of your market. Break down the total market into segments, considering geographic locations and market segments. For instance, if you’re targeting small and medium-sized businesses (SMBs), specify the number of SMBs in your target geography and target industries.
3. Quantify Annual Spending:
Provide insights into the current market spending on products or services similar to yours. Total market spending and average spend per customer. Use data from reputable sources to showcase the annual spending in your target market. This figure will help investors gauge the revenue potential for your business.
4. Predict Market Growth:
Investors are interested in the future. Use reliable data and forecasts to estimate how much the market is expected to grow over the next five years. This demonstrates the long-term viability of your business.
Three Approaches to calculating your Market Size
1. Bottom-Up Approach:
a. Calculate the number of potential customers.
b. Multiply by the average annual spend per customer.
2. Top-Down Approach:
a. Begin with an estimate of the overall market size (total annual spending by all customers in the market).
b. Apply filters based on your target customer, your offering, and geography.
3. Competitor Market Share:
a. Sum up revenues of main competitors.
b. Estimate their total market share.
c. Divide their total revenues with their total market share.
Triangulation: The Best Practice
Combine all three approaches to calculate market share. If the estimates align, it strengthens the credibility of your analysis. The bottom-up approach is ideal for new markets or groundbreaking solutions, while top-down and competitor share approaches suit established markets.
Presenting Your Market Analysis in your pitch deck
Total Addressable Market (TAM) : The overall market demand for your product or service. This gives an idea of the maximum opportunity for your business at full scale.
Serviceable Available Market (SAM) : The portion of TAM applicable to your offering. This gives an idea of the opportunity for your business constrained by its operations (geographical focus, product functionality, customer segment focus, etc.).
Serviceable Obtainable Market (SOM) : The share of SAM you plan to capture within 5 years. Or simply put, the revenues you expect your business to earn in 5 years from now.
Expected Growth Rate of SAM : Crucial for new markets; it indicates future market size. The market might be small and at a nascent stage now, but if it is rapidly growing, you need to show the market opportunity in the future.
Support the expected market growth rate with relevant market trends. This is especially important for high growth markets where you expect double or triple digit annual market growth.
Conclusion
A well-executed market analysis slide is a cornerstone of a compelling pitch deck. By answering questions about target customers, market size, and growth, backed by data from various approaches, you increase investor confidence in the revenue potential of your business. Remember, a thorough and well-supported market analysis that shows a large opportunity is a key step towards securing funding.
Check out the Modeliks story as covered in The First Dispatch .
