Startups Should Do “Value Pool Sizing”, Not “Market Sizing”

Value pool sizing, as a mathematical exercise, can be simple. What’s the $ size of a pain that a buyer has? How much can we alleviate it? That’s it.

Your revenue is the percent of the value pool you can capture in price, while the rest goes back to the buyer as the value they get for using your product.

Note that a value pool is focused on a specific customer pain point and area of need. The need may not yet be served by any solution.

Market sizing is an exercise to size up … well, a market. A market by definition already has one or more major incumbents that define it. A market is then defined by a type of product and not a specific need.

How to do Value Pool Sizing

For example, let’s look at customer turnover for commuter rails. From our interviews, imagine we heard 30% turnover in rider base over the course of a year is normal. They measure the cost of customer turnover as equal to the cost to acquire a replacement — about $500.

Thus, the size of the pain = a ridership base of 100k people * $500 * 30% = $15M / year.

Our targeted impact is a percentage of that size of pain. If we can help them reduce their turnover rate by a tenth (i.e. 30% -> 27%) it would be worth $1.5M…