Market sizing is a key process for businesses. They may use this information to estimate the potential customers for their service or product. Additionally, it reveals the potential earnings. Let us find out what market sizing is and how to do it correctly.
Why Do Market Sizing?
Market sizing helps businesses in four main ways:
- Make better plans
- Set budgets
- Get investors interested
- Understand customers
Make Better Plans
Knowing market size helps organizations make wise decisions. It can determine whether a new product is worth creating and help them plan sales.
Set Budgets
Market sizing estimates company revenue. This helps them budget for product development and promotion.
Get Investors Interested
Businesses typically require investor funding to develop. Showing market size might attract investment.
Understand Customers
Market sizing informs organizations about potential customers. This helps them create and market desirable items.
How to Calculate Market Size
Steps to calculate market size:
- Your target customers
- Quantify target consumers.
- Determine how many may purchase from you.
- Market size calculation
- Use this data to decide.
Use these tools to help:
- Ask people questions
- Check corporate reports.
- Special computer programs
- Visit and chat with individuals
Understanding TAM, SAM, and SOM
These three words assist organizations in comprehending market segments:
Total Addressable Market (TAM)
The largest number is a product’s TAM, which is all potential consumers. It illustrates how much money might be produced if everyone purchased it.
TAM would be all phone buyers in a year.
Serviceable Available Market (SAM)
Businesses may attain SAM of TAM. Smaller than TAM.
If you had a French only app, SAM would be its user.
Service Obtainable Market (SOM)
The smallest portion is SOM—the number of clients a firm can attract and profit from.
Why TAM, SAM, and SOM Matter
These figures matter because:
- Help companies develop objectives
- Show whether a concept is profitable.
- Influence investors to back a company.
How to Calculate TAM
There are four ways to figure out TAM:
- Top down approach
- Bottom up approach
- Value theory approach
- Third party research
Top-down Approach
Start by narrowing down broad industry statistics. While this is fast, it can sometimes be precise.
Bottom up Approach
Gather your data first, and then add to it. The time investment is more, but the accuracy is higher.
Value theory Approach
Evaluate the potential price point for the value your product provides to consumers. New goods benefit from this.
Third party Research
Put the knowledge of market researchers to use. While this is quick, it may become pricey.
How Investors Look at TAM, SAM, and SOM
These numbers determine whether to invest in a firm. They consider:
- What is the current client count?
- Is the company able to expand into other markets?
- If the company can develop innovative goods
Six years, rather than a few months, is the typical time frame investors consider when evaluating a company.
Example of TAM, SAM, and SOM
Let’s say you want to make an app to help people find parking:
- TAM: All the drivers in the world
- SAM: Drivers in the places where your app works
- SOM: The number of drivers who will use your app
Why Accurate Market Sizing Matters
Accurately calculating these figures is critical because:
- Companies can make better decisions with its assistance.
- It reveals the viability of a new product concept.
- Companies may spend their money wisely.
- The likelihood of investors lending a hand increases
Conclusion
Market sizing helps firms estimate their consumer base and revenue. TAM, SAM, and SOM help market comprehension.
Remember, all statistics are estimates. However, they improve company planning and decision making and help investor relations.
Businesses may make better decisions by considering the market size. They choose merchandise and sales methods. This helps them succeed.