What is Market Sizing? How to Measure Your TAM, SAM, and SOM

What is Market Sizing? 

Market sizing encompasses the accurate estimation of the number of buyers pertaining to a specific product or service within a particular market sphere along with the total revenue these potential sales may garner. It is crucial for industry players to get insights on the profit-based feasibility of a new business, service, or products. Proper market sizing enables industry participants to make informed investment or launch decisions.  

Why do Market Sizing?  

It is crucial for business owners to estimate and understand the market size due to a wide array of factors. Through the accurate calculation of the market size, industry participants can- 

Formulate effective marketing and business strategies- In order to formulate effective growth strategies, it is crucial for business owners to develop a complete understanding about the market. By calculating the potential number of buyers and revenue projections, they can easily determine how big the market is. This in turn allows them to make efficient and safe business centric decisions while reducing the chances of monetary loss.  

Get budget-based clarity- In order to scale a business, it is important for the concerned members to make a proper budget strategy. Financial clarity remains an integral part of deciding the growth of an enterprise. Having a 360-degree outlook of a company’s economic condition helps business owners to fix their overall budget and adhere to it for upcoming project completions. Procurement of the potential market sizing and revenue estimations allows business owners to invest the right amount of money on the right source with minimal risks. 

Attract Investors- Most of the businesses look for proper financial support and are always on a lookout for strong investors. But before investing a huge sum in any business, investors require a comprehensive understanding on the profit-based trajectory of that particular enterprise. Through market sizing estimations, business owners or entrepreneurs can convince the potential investors or stakeholders that the particular project or plan is eligible to garner notable returns and therefore is worth investing on.  

Understand their target buyers/consumers in a better way- A company sells its products or services to a specific group of people, also referred to as the target consumers. Therefore, it is crucial for them to understand the buying preferences of these consumers along with other key factors. Based on the acquired information, the enterprises can formulate their marketing and selling strategies as per the demographics of their potential buyers. 

How to calculate market size? 

Now that we have understood the importance of market sizing, let us find out how to methodically calculate it.  We shall be using a five-step process to get near accurate market size estimation- 

1. Identification of target customers 
2. Calculate the number of target customers 
3. Determination of the company’s penetration rate 
4. Calculation of the potential market size- volume and value 
5. Application of the market-size data 

Tools to estimate the market size 

Some of the efficient tools used by business owners for the accurate estimation of their market size are-  

1. Primary and secondary research 
2. Financial reports of target companies 
3. Market research tools 
4. In person visits and interviews 

What is Total Addressable Market (TAM)? 

Total Addressable Market (TAM) is defined as the total revenue opportunity available for a specific product or solution. In helps business owners to determine the feasibility of their upcoming projects in terms of product or service launch. By identifying a market’s underlying potential, the concerned bodies can formulate effective strategies in terms of product/service pricing, placement, and promotion.  It further helps investors to get an understanding of the potential gains their investments may garner over a stipulated timeframe.  

Citing an instance, if a company deals in mobile phones, the potential market size will be the number of people who buy cell phones in one year.  

What is SAM? 

Serviceable Available Market (SAM) is defined as the specific portion of the Total Addressable Market that can be reached by a company by using their current business model.  In simple words, it can be described as the size of the potential customers who are likely to buy the product/service. 

For instance, a company launched an application in a specific language i.e., French. So, the SAM would potentially by the subset of the TAM predominantly covering that part of the population that primarily speaks French.  

What is SOM? 

Service Obtainable Market (SOM) is referred to the portion of the Serviceable Available Market that the company can actually serve and accrue significant revenue. It enables business owners to predict their upcoming sales on the basis of market share percentage. It further helps the management to adopt a profitable strategy that will accurately position their enterprise within the industry vertical. 

The pivotal factors that contribute to SOM are market size and reach, product, competition, historical performance, and external research. 

Why is TAM important? 

The total addressable market is important to most, but not all, early-stage businesses. For those who investigate further, VCs focus on the total number of customers in the existing geographic market, the size and likelihood of broader geographic sales, and the product expansion roadmap. Further penetration of current products sold in existing markets is given the most weight in the TAM calculation, while sales of new products in unproven geographies receive the least weight. Although the TAM estimate may not be the most crucial element when securing funding for a startup during its early stages, it is still something you need to be mindful of. To assess revenue potential, VCs typically look ahead six years rather than six months. 

TAM SAM SOM Explained From The Investor’s Point Of View 

In other words, investors want to know if your startup will be successful because of the size of the market you are targeting. Let’s take an example. Consider you wish to develop an application to help drivers find available parking slots, TAM refers to the total number of drivers in the world, SAM refers to the number of drivers in the areas you are servicing, and SOM refers to the share of the market you will eventually capture. 

TAM Is a Popular Metric That Is Often Misunderstood   

Total Addressable Market is often misused and calculated incorrectly, which can cause unrealistic revenue benchmarks. A TAM of around $1 trillion often appears with an arbitrary 1% of targeted market share attached, without any justification. If a company reports revenues of $10 billion, it may be difficult for investors to believe. This is because such a large amount of money does not usually appear overnight. On the other side, SAM is the opportunity that exists within a company's current capabilities and ambitions to segment customers more stringently based on what kind of offering they will deviate towards from their purchasing decisions. 

How do you calculate total addressable market?   

Your TAM can be calculated with a simple formula, but it requires market research and accurate data to produce it. This can be done with below-mentioned four methods: 

• Top-down approach 
• Bottom-up approach 
• Value-theory approach 
• Third-party research 

Top-down approach 

The top-down approach to estimating your Total Available Market (TAM) size begins with industry research. This can be used to determine how many users meet your market criteria and the size of the industry. 

The inverted pyramid method for representing a company's end-user is shown as the smallest part of the pyramid. According to secondary market research, this industry is an $X billion market, and your company manages a percentage of that market.  

However, research from external sources may not have the specific information you need for your addressable market, and estimations may include or exclude additional segments. 

Bottom-up approach 

A bottom-up approach is more accurate because it uses first-party data to estimate revenue and market growth more accurately. To calculate your market size using a bottom-up approach, multiply the total number of accounts that use products or services similar to yours by the annual contract value (ACV) of your company’s product or service. 

TAM = (Total no. of Accounts) x ACV 

Value-theory approach 

The value theory method of calculating total addressable market is more based on assumptions and guesswork, so its conclusions are usually less clear, but still useful. To calculate the Total Addressable Market (TAM) using value theory, you must calculate the value that your product will provide to specific users and if you can capture that value through pricing sufficiently. 

Third-party research 

One way to find a TAM is to look at professional data that has already been collected. You can find this data by looking at private research reports or press releases. The main advantages of using these figures are that they are quick to obtain and are compiled by a more skilled professional with credibility. 

Questions to Ask When Defining Your TAM 

To identify companies in your Target Account Market, use your B2B database to filter by industry, company size, and location. Having too many filters will result in small market opportunities, while not enough filters will make it difficult to identify your target market. Focus on below important questions when it comes to defining your TAM. 

• Who are your current and potential customers? What are their characteristics? 
• What industries have we sold products to in the past? Where are those companies located? 
• How big are those companies? 
• What is the rate of growth for the market? Are there new entrants? Or bigger budgets? 
• In which areas can we expect growth?