Market sizing is all about understanding the potential. Every business aims to improve this metric. However, before you set off on the path to market dominance, it’s crucial to first determine the size of the market. Only then can you craft a strategic plan to capture a larger share of it.
A business has little chance of success without a clear market. Understanding the current size and structure of the market is a critical step in the early stages of building a business. This insight will influence everything from your short- and medium-term objectives, product development, and even your ability to pitch to investors.
Before relying on syndicated research or outdated data from previous years, let me show you how to approach market sizing using fresh, up-to-date information that accurately reflects the market as it stands today—not from last quarter or last year.
What is Market Sizing?
Market sizing is the process of estimating the potential size of a market for a product or service. It involves determining the total demand for a product or service in a specific market, which helps businesses understand the scope of opportunities available. Market sizing provides a clear picture of the total addressable market (TAM), which includes the entire market demand for a product or service, and can also involve more specific subsets like the serviceable available market (SAM) or serviceable obtainable market (SOM).
Why Conduct Market Sizing?
Conducting market sizing is essential for several reasons, as it provides valuable insights that help businesses make informed decisions and plan strategically. Here are key reasons why market sizing is important:
Assess Market Potential: Market sizing helps you understand the total demand for a product or service within a specific market. This information reveals the potential for growth, revenue generation, and the overall attractiveness of the market.
Informed Decision-Making: By accurately estimating market size, businesses can make informed decisions about whether to enter a market, launch a new product, or expand existing offerings. It helps avoid entering markets that may be too small or saturated, reducing the risk of failure.
Resource Allocation: Understanding the size of the market helps businesses allocate resources more effectively. With clear data on potential demand, businesses can invest in the right areas, such as marketing, product development, and sales, to maximize returns.
Set Realistic Targets and Goals: Market sizing allows businesses to set achievable growth targets and sales goals based on the actual potential of the market. Without accurate market data, businesses risk overestimating or underestimating their capabilities and opportunities.
Attract Investment: Investors typically want to see the potential for growth before committing capital. Market sizing provides a clear picture of the market opportunity, making it easier to attract investors who want to understand the return on investment (ROI) prospects.
Identify Market Gaps and Opportunities: By segmenting the market, businesses can uncover underserved niches or gaps where there is unmet demand. This allows them to tailor products and services to specific customer needs, creating a competitive advantage.
Mitigate Risks: Conducting market sizing helps identify potential risks, such as market saturation or a lack of demand. With a better understanding of the market dynamics, businesses can create contingency plans and adapt their strategies accordingly.
Guide Strategic Planning: Market sizing provides the data necessary for long-term strategic planning, including product roadmaps, pricing strategies, and market entry plans. It also helps businesses determine the best markets for expansion.
Calculating Market Size
A market sizing study involves evaluating several key metrics: TAM, SAM, and SOM. These calculations help determine the size of a company in relation to its market and competitors. Below, we break down the key factors influencing your potential market size.
TAM (Total Addressable Market)
TAM refers to the total demand for a product or service in a particular market. It represents the maximum revenue a company could generate if it were to capture 100% of the market for its product or service. TAM is valuable for companies looking to assess the overall potential for growth in a given market.
There are two main ways to calculate TAM: By Sales: Add up total sales across all stores and retailers in the market. By Consumer Behavior: Multiply the average number of purchases per person by the total population, then multiply that by the average price of the product.
SAM (Serviceable Addressable Market)
Due to business constraints, such as specialization or regional limitations, it’s unlikely that a company can serve its entire TAM. SAM helps businesses estimate the portion of the market they can realistically capture based on their capabilities. To calculate SAM, add up the total sales of relevant products across the market that align with your business’s strategy and target.
SOM (Serviceable Obtainable Market)
It’s rare for a company to capture 100% of its serviceable addressable market (SAM). Even if you have minimal competition, it’s still a challenge to convince every potential customer to purchase your product or service. SOM represents the portion of the SAM that a company can realistically obtain, often considering market competition and customer acquisition limitations. SOM is especially valuable for setting short-term growth targets.
To calculate SOM: Market Share Calculation: Divide last year’s revenue by last year’s SAM to determine your market share. Forecast SOM for the Current Year: Multiply your market share by the current year’s dollar-value SAM to estimate your expected SOM for the year.
Calculating TAM, SAM, and SOM
There are two methods for calculating the TAM, SAM, and SOM:
Top-Down Approach
The top-down approach involves narrowing down and evaluating what portion of the market a company can capture by analyzing broader, macroeconomic trends within the industry. Founders typically base their estimates on external market insights provided by industry experts. This method requires analyzing a range of factors, such as customer behavior, demographic data, GDP growth, trade balances, raw material prices, surveys, industrial activities, energy consumption, and more. A typical top-down analysis might include the following steps:
- Analyzing national economies
- Assessing all competitors within relevant sub-sectors
- Estimating the total international market size
- Analyzing each sub-sector of the national market
By synthesizing all this information, an estimate can be made regarding how much of the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) a company can realistically capture.
Bottom-Up Approach
As the name suggests, the bottom-up approach is the reverse of the top-down method. This approach starts with basic business data, such as the number of customers, the quantity of products sold, and the average price point. These details are then used to extrapolate insights about the broader market.
Tools for Calculating Market Size
In addition to the market size calculations mentioned above, there are various other methods for determining your TAM and SAM. Here are some common techniques:
- Primary and Secondary Research: Begin by exploring online resources that offer market data. These might include articles, case studies, white papers, product launch announcements, and similar content.
- Financial Reports: Publicly traded companies are required to release financial reports, which can be valuable for gaining insights into the market and understanding competitors' strategies.
- Market Research Tools: Market research comes in various forms. You can either hire a firm to generate a one-time report or invest in tools that provide on-demand access to real-time market data.
Conclusion
The idea of the total addressable market is critical for both startups and established companies. It helps them emphasize on certain products, consumer segments, and business prospects by giving them an estimate of the effort and resources necessary to make the initiative work. TAM can be used by corporate management to give a credible value proposition to interested investors and buyers of the brand.
Author's Detail:
Aparna Dutta /
LinkedIn
Hello, I am a content writer with 3.5 years of experience. I have experience in various fields of content writing. For example, I have worked in a market research organization where I had to write content related to the reports that the company used to generate to improve their Google ranking. Other than that, I have also worked in website content as well as technical content for print and digital media magazines. Apart from this I am very flexible as a person and can adjust easily.
