Market sizing is necessary for business planning and budgeting. In developing your business plan, one of the first things that you will face is the challenge of determining the size of your market.
Let's have a look at how you can analyze your market size, and how you can use this data to make informed strategic decisions.
The defininiton of market size:
The "market size" is the total number of potential buyers of a product or service within a given market, and the total revenue that these sales may generate. This is also called TAM (Total Available Market).
For your business plan, you also need to know SAM, which stands for Served Available Market.
SAM (Served Available Market) is the part of the TAM who are able to use your solution to the problem. This is your target market.
SOM (Serviceable Obtainable Market):
Unless you're a monopoly, you most likely can’t capture 100% of your serviceable addressable market. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your product or service. That’s why it’s crucial to measure your serviceable obtainable market to determine how many customers would realistically benefit from buying your product or service.
Serviceable Obtainable market is most useful for businesses to determine short-term growth targets.
Market sizing methods:
1. Top-Down Approach
In this method, you use industry data, market reports, and research studies to identify the TAM.
However, there are limitations here. Data generated by industry groups may not always be kept up to date and may not reflect niche elements of your market. You may want to hire a market research consulting firm to conduct fresh research that is focused on your need areas.
2. Bottom-Up Approach
The bottom-up approach to TAM calculation is based on previous sales and pricing data. First, multiply your average sales price by your number of current customers. This will yield your annual contract value. Then, multiply your ACV by the total number of customers. This will yield your total addressable market.
The value theory depends on how much value consumers receive from your product now and how much they're willing to pay in the future for that product