A guide to market sizing for healthcare innovators

market sizing healthcare innovation

Second in a series of Innovator’s Roadmap posts from Boston Children’s Hospital’s Innovation & Digital Health Accelerator (IDHA). Matt Murphy is Innovation Lead at IDHA.

We recently published some helpful tips on how to create a business model that accelerates and operationalizes a healthcare innovation. But a business model — and the unique value proposition you’ll offer to your users or customers — cannot exist on its own. It must serve a specific market or population.

Who are your users? And how many potential users would your product serve? Market sizing will enable you to answer these questions and others as you determine the financial opportunity and economic sustainability of your innovation.

What is market sizing?

Market sizing is an approach to estimating the total number of potential users and sales opportunities. Determining market size will have implications for your pricing strategy, as well as future conversations with potential funders and maybe even investors.

market sizing a healthcare innovation
Carla Small (center), senior director of innovation at Boston Children’s Hospital, at a panel discussion on best practices for startups approaching market, flanked by Dylan Martin of BostInno (L) and Sam Lambson of Cerner.

Market sizing may more be familiar than you expect. As a clinical or biomedical researcher, you first and foremost need to define the size of your population, often applying filters to target the population subset relevant to your research question. The process of market sizing — determining the number of people who will purchase your product or service — is a very similar exercise.

Market sizing requires researching the industry, your competitors and alternative products in the market you plan to enter. You’ll need to analyze three levels of the market: geography, regulations and ability to scale. From this analysis you can make a conservative and best-case estimation of the market size.

Market sizing is also an art. It requires you to make assumptions based on unknown business outcomes or market trends. Fortunately, there are specific variables to help frame the exercise:

  • The Potential Market Opportunity is the value of a particular product or service in a population over a specified time (usually one year). To find it, multiply the total number of potential buyers in a population by the price of a product or service. For example, a product that costs $15 for physicians (who numbered 926,119 as of 2016) would create a potential United States market opportunity of $13.89 million in a given year.  While it’s unrealistic to assume that everyone in the population will become a customer, Potential Market Opportunity provides an important long-term metric and a benchmark through which potential investors, partners and executives can compare multiple business opportunities.
  • The Total Addressable Market (TAM) applies additional filters and criteria to a population to get closer to a true value. The filters you apply should delineate your ideal users or customers. For example, a product that costs $15 and is specifically intended for primary care physicians (441,735 as of 2016) would create a total addressable U.S. market of $6.62 million. The TAM assumes of course, that you could convert all potential opportunities to paying customers.
  • The Segmented Addressable Market (SAM) will take in-depth market research to understand. It is the segment of the TAM within reasonable proximity and accessibility to you, the innovator. When presenting this metric, it is important you fully understand the logical assumptions you’ve made and how you justify them. Say your TAM consists of 441,735 primary care physicians, and they practice all across the U.S. An innovator in Boston likely won’t reach a primary care physician in California, simply due to geographic limitations. So you subtract the 49,559 primary care physicians in California from the TAM to further define your segmented addressable market.
  • Expected Market Share (SOM) is the percentage of potential customers you can expect to convert to actual paying customers. This value is highly context-specific. For example, the expected market share for a product sold direct to physicians, via a mobile app, is a significantly different from that when selling to healthcare institutions via a technology partner. This estimation requires deeper, qualitative industry research and is influenced by others in the market.

market sizing healthcare innovation

Putting it all together

When you have an understanding of the market and reasonable estimates of potential paying customers, you can begin crafting your market sizing analysis for presentation.

But know that while market sizing is an important business tool for estimating commercial potential, it is still only one input. Many innovations might have a small market, but a tremendous impact.

With a well-informed market sizing, you can begin thinking about innovation through the eyes of those companies and investors who might want to bring your idea to market. For another perspective specific to diagnostics, see our recent post, 6 tips from industry: getting academic diagnostics to market. In our next post, we offer tips on designing for digital health.

Download the complete Innovator’s Roadmap.