How do you gauge a fintech start-up’s market potential and growth rate?
Fintech start-ups are disrupting the financial services industry with innovative solutions and business models. But how do you know if your idea has enough market potential and growth rate to succeed? In this article, we will explain some key concepts and methods to measure the market size, segment the customers, and estimate the growth rate for a fintech start-up.
Market size
Market size is the total revenue or demand that your start-up can potentially capture from your target customers. It indicates how big the opportunity is for your fintech solution. To estimate the market size, you need to define your value proposition, identify your target market, and collect data on the existing or potential customers, competitors, and industry trends. You can use different approaches to calculate the market size, such as top-down, bottom-up, or value-based methods.
Market segmentation
Market segmentation is the process of dividing the market into smaller groups of customers who share similar characteristics, needs, preferences, or behaviors. It helps you to focus on the most profitable or attractive segments, tailor your marketing and sales strategies, and differentiate your fintech solution from the competitors. You can use different criteria to segment the market, such as geographic, demographic, psychographic, or behavioral factors.
Growth rate
Growth rate is the percentage change in the market size or revenue over a period of time. It indicates how fast the market or your start-up is expanding or contracting. To estimate the growth rate, you need to project the future market size or revenue based on historical data, industry trends, customer feedback, and competitive analysis. You can use different methods to forecast the growth rate, such as trend analysis, regression analysis, or scenario analysis.
TAM, SAM, and SOM
TAM, SAM, and SOM are acronyms that represent different levels of market size and segmentation for a start-up. TAM stands for total addressable market, which is the maximum revenue or demand that your fintech solution can generate if you capture 100% of the market. SAM stands for serviceable available market, which is the portion of TAM that you can realistically reach with your current or planned resources and capabilities. SOM stands for serviceable obtainable market, which is the share of SAM that you can actually capture with your current or planned competitive advantage and differentiation.
Example of market sizing and segmentation
To illustrate how to measure the market potential and growth rate for a fintech start-up, let’s use a hypothetical example of a start-up that offers a mobile app for peer-to-peer lending in India. The start-up’s value proposition is to provide an alternative and convenient way for individuals to borrow and lend money without intermediaries or high fees. The start-up’s target market is the urban population in India who are smartphone users and have bank accounts.
To estimate the TAM, the start-up can use the top-down approach and multiply the total number of smartphone users in India (around 500 million) by the average annual amount of peer-to-peer lending transactions per user (around $200). This gives a TAM of $100 billion. To estimate the SAM, the start-up can use the bottom-up approach and multiply the number of smartphone users in urban areas in India (around 300 million) by the percentage of smartphone users who have bank accounts (around 80%) by the average annual amount of peer-to-peer lending transactions per user (around $200). This gives a SAM of $48 billion. To estimate the SOM, the start-up can use the value-based approach and multiply the SAM by the percentage of customers who are willing to pay for the start-up’s app (around 10%) by the average annual fee per user (around $10). This gives a SOM of $480 million.
To estimate the growth rate, the start-up can use the trend analysis and look at the historical data on the smartphone penetration, bank account penetration, and peer-to-peer lending volume in India. The start-up can also use the scenario analysis and consider the different factors that can affect the future demand for its app, such as regulatory changes, customer preferences, competitive threats, and technological innovations. The start-up can then project the best-case, worst-case, and most-likely scenarios for its market size and revenue growth over the next five years.
Here’s what else to consider
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