At the end of this post, you will learn how investing an hour to properly calculate the market size could have spared top tier VCs such as Kleiner and Google investing $120 million in Juicero that had a market size of just $33,000!!

While Minimum Viable Product (MVP) is the best way to test your market fit and go-to-market strategy, you still need to do some calculations before the MVP phase to learn about your market size and what demand you would expect provided your business and market constraints.

Let’s Roll Up Our Sleeves and Get to Work!

Terminology

• Total Addressable Market (TAM): The revenue from selling your product or service assuming your company has unlimited resources and has no competitors.
• Serviceable Addressable Market (SAM): The revenue from selling your product or service limited by the actual amount of resources your company has.
• Serviceable Obtainable Market (SOM): The revenue from selling your product or service limited by the actual amount of resources your company has and all potential competitors and substitutes.

Calculate Market Size

Juicero planned to launch their $700 juice making machine in California, Arizona, and Nevada. So we will calculate TAM, SAM, and SOM for those markets.

Since a household usually owns 1 juice making machine at home, we will do our analysis based on household statistics published by the Census Bureau:

• 13 million households in California.
• 2.5 million households in Arizona.
• 1 million households in Nevada.

To buy a $700 juice machine, a household must be affluent so we will assume only households with more than $150,000 annual income will buy it and those are 18%, 9.8%, and 8.7% respectively of each state’s households.

So our group who can afford a Juicero is 13M * 18% + 2.5M * 9.8% + 1M * 8.7% = ~2.7M of affluent households.

TAM

USDA tells us that roughly 14% of Americans drink juice during at least one meal, usually breakfast, which equals to 2.7M * 14% = 378,000 affluent juice drinking households.
TAM: 378,000 * $700 (a Juicero price) = $265 Million is the market size of all potential juice drinkers who buy from Juicero only.

SAM

SAM imposes more realistic resource constraints on the company.

Let’s say Juicero is going to spend enough on marketing to achieve 2.5% brand awareness. It means that out of every 100 juice drinking household we survey, 2.5 of them heard of Juicero one way or another.
Juicero also requires WiFi but we will assume that all affluent households already have WiFi at home.

SAM: $265M(TAM) * 2.5% = ~$6.6 Million.

SOM

Here we should consider all alternatives for consumers including blenders, juice shops, supermarket juices, and other competitors.
Since I don’t have statistics on where Americans buy their juice from, I will assume 50% buy it from supermarkets, 40% are happy with their existing blenders or juice machines, and 5% are going to buy from competitors. This leaves us with only 5% are going to buy a Juicero.

SOM: $6.6M(SAM) * 5% = $33,000.

And this is the result we can reasonably expect Juicero to achieve from selling their juice machines!

As you can see, a simple quick calculation can save us investing a lot of time and money in the wrong direction. 🙂