Benedict Evans has a really good article on Ways to Think About Market Size.
Almost every market sizing article or book that you read tell you to find out how many people or businesses use X and how much they pay for X on average (call it Y). It all seems pretty straight forward and a lot of people use this simple math to justify their business.
Benedict really lays out why most of this is utter crap and that, in fact, most of the data we use to convince ourselves of market size is completely useless.
This is the problem with forecasting sales of the Apple Watch. Annual watch sales are a bit over a billion units, and people buy watches at anything from $5 (China exported over 600m watches last year at an average wholesale price of $3) to $500, $5000 and $50,000. But this doesn’t tell us anything useful. The fact that you buy a $10 watch, or a $1,000 or $10,000 watch, or buy no watch at all, tells me nothing about whether an entirely new product that you also wear on your wrist would be appealing. The fact that you bought a watch x years ago and the average replacement rate for watches is y tells me nothing about whether you’d replace it with an Apple watch, tomorrow, if you saw one.
He goes on to argue that market size is less about what people have bought in the past and for how much and more with how do spending habits change if it’s cheap.
So, to work out market size, really, you have to work out who will care, if it is cheap.
This is a brilliant observation and one that many people tend to overlook (including myself).
I won’t summarize the entire article here, but it is definitely worth a read, and better yet, clip it to Evernote and re-read it again.