Market Sizing (TAM, SAM, SOM)

Market sizing is a critical exercise in any business strategy. It helps companies understand the potential size of a market, identify potential customers, and determine how to effectively target them. By doing so, companies can make informed decisions about resource allocation, sales forecasting, and investment opportunities.

Market sizing is typically broken down into three different metrics: Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). Each of these metrics provides valuable insights into the size of a market and the potential for growth.

Total Addressable Market (TAM)

TAM is the total market demand for a particular product or service. It represents the entire potential market for a company, assuming there are no limitations on supply or competition. TAM is often the largest of the three metrics and provides a high-level estimate of the size of the market.

The TAM is typically calculated by taking the total number of potential customers and multiplying it by the average price of the product or service. This calculation assumes that every potential customer would be willing to pay the full price for the product or service. While this is rarely the case, it provides a good starting point for estimating the size of the market.

Serviceable Addressable Market (SAM)

SAM is the portion of the TAM that a company can realistically target based on its resources, capabilities, and competition. It represents the segment of the market that a company can effectively serve with its current offering. SAM is a more realistic estimate of the size of the market for a company, as it takes into account the limitations of its resources and competition.

The SAM is typically calculated by taking the TAM and subtracting any portions of the market that are not accessible to the company due to factors such as geography, regulatory restrictions, or competition. The resulting number represents the portion of the market that the company can realistically target.

Serviceable Obtainable Market (SOM)

SOM is the portion of the SAM that a company is currently serving. It represents the company’s current market share and provides insights into its position within the market. SOM is a useful metric for measuring the effectiveness of a company’s marketing and sales efforts, as well as its ability to retain customers and grow its market share.

The SOM is typically calculated by taking the company’s total sales revenue and dividing it by the total revenue of the SAM. The resulting number represents the company’s market share as a percentage of the total market.

Benefits of Market Sizing

Market sizing provides a range of benefits for companies of all sizes and industries. These benefits include:

› Better Resource Allocation:

Market sizing helps companies understand the size of the market and the potential for growth. This information can be used to allocate resources effectively and efficiently, ensuring that resources are directed toward the areas of the business that will have the most impact.

› Sales Forecasting:

Market sizing provides a clear picture of the potential demand for a product or service, which can be used to forecast sales revenue. This information is valuable for budgeting and forecasting purposes, as well as for determining pricing strategies.

› Investment Opportunities:

Market sizing can help companies identify potential investment opportunities in new markets or product categories. By understanding the size of the market, companies can determine whether the potential return on investment justifies the risk.

Use Cases for Market Sizing

Market sizing is a versatile tool that can be used in a range of business contexts. Some common use cases include:

New Product Development:

Market sizing is an essential tool for companies developing new products or entering new markets. It helps companies understand the potential demand for their offering and identify the most attractive market segments to target.

Competitive Analysis:

Market sizing is valuable for companies looking to understand their position within the market relative to their competitors. By comparing their market share to that of their competitors, companies can identify areas for improvement and
develop strategies to gain a larger share of the market.

Marketing Strategy:

Market sizing is crucial for developing effective marketing strategies. It helps companies identify the most lucrative market segments to target and tailor their messaging and tactics accordingly.

Investment Opportunities:

Market sizing can also help companies identify investment opportunities in new markets or product categories. By understanding the size of the market and potential growth opportunities, companies can make informed decisions about where to allocate resources.

Mergers and Acquisitions:

Market sizing is often used in the due diligence process for mergers and acquisitions. It helps companies assess the potential value of the target company and determine whether the acquisition makes financial sense.

Grey Radius Methodology for Market Sizing

Here at Grey Radius, we follow several methods for conducting market sizing, depending on the industry, product or service, and available data. Some common methods include:

Top-Down Approach: This approach involves estimating the size of the market based on industry data and trends. It typically involves using secondary research, such as industry reports and government data, to estimate the size of the market.

Bottom-Up Approach: This approach involves estimating the size of the market by analyzing the potential demand for a product or service among individual customers or businesses. It typically involves primary research, such as surveys or focus groups, to understand the potential demand for the product or service.

Expert Opinion: This approach involves consulting with industry experts or analysts to estimate the size of the market. It can be useful when there is limited data available or when the market is complex or rapidly changing.

Combination Approach: This approach combines the top-down and bottom-up methods to create a more accurate estimate of the market size. It involves using both secondary and primary research to estimate the size of the market.

Get in touch for your market sizing needs

Market sizing is a critical exercise for any business strategy. It helps companies understand the potential size of a market, identify potential customers, and determine how to effectively target them. By using metrics such as TAM, SAM, and SOM, companies can gain valuable insights into the size of the market and the potential for growth. Market sizing provides a range of benefits, including better resource allocation, sales forecasting, and investment opportunities. By using a combination of research methods, companies can create a more accurate estimate of the market size and make informed decisions about their business strategy.