Size Matters: A Startup's Roadmap to Market Sizing in 5 Steps
When starting a new business, it's crucial to measure the size of your target market to ensure that there is sufficient potential for your new product or service.
Sizing up your market involves determining the total addressable market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM) for your product or service.
Below are the steps you can take to calculate your market size.
Step 1: Define your Target Market
The first step in sizing up your market is to define your target market. This involves identifying the specific group of people or businesses that your product or service is designed for. Factors to consider when defining your target market include demographics, psychographics, and behaviours.
Step 2: Determine your Total Addressable Market (TAM)
The next step is to determine your total addressable market (TAM). TAM represents the total market demand for your product or service. It's the total revenue opportunity available if you were to capture 100% of the market share. To calculate TAM, you'll need to estimate the total number of potential customers in your target market and multiply that number by the average revenue per customer.
# of potential customers in target market X avg revenue per customer
Step 3: Calculate your Serviceable Available Market (SAM)
The serviceable available market (SAM) represents the portion of the total addressable market (TAM) that you can realistically target and serve. It's the market segment that is within your reach based on your business model, resources, and geographic location. To calculate SAM, you'll need to estimate the percentage of the TAM that you can realistically target and multiply that by the total TAM.
% of TAM you can realistically target X total TAM
Step 4: Estimate your Serviceable Obtainable Market (SOM)
The serviceable obtainable market (SOM) represents the portion of the serviceable available market (SAM) that you can realistically capture. It's the portion of the market that you can win over based on your business strategy and marketing efforts. To calculate SOM, you'll need to estimate the percentage of the SAM that you can realistically capture and multiply that by the total SAM.
% of SAM you can realistcally capture X total SAM
Step 5: Analyse your Competitors
The final step in sizing up your market is to analyse your competitors. This involves identifying your main competitors, analysing their strengths and weaknesses, and assessing their market share. This information will help you determine how much of the serviceable obtainable market (SOM) you can realistically capture.
Learn how to conduct a competitor analysis here.
TAM, SAM, and SOM: What's the Difference?
To recap, TAM represents the total market demand for your product or service, SAM represents the portion of the TAM that you can realistically target and serve, and SOM represents the portion of the SAM that you can realistically capture. TAM is the largest market size, while SOM is the smallest market size.
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By understanding the TAM, SAM and SOM for your product or service, you can determine the size of your market opportunity and develop a business strategy that aligns with your market potential. Remember to define your target market, calculate your TAM, SAM, and SOM, and analyse your competitors to get a comprehensive view of your market.
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