Market Sizing: Key to Strategic Business Planning
05 September 2024
One of the key factors in ensuring a product's success in the market is market sizing. Before launching a new product or service, it's crucial to analyze market sizing to ensure that the business initiative reaches the intended audience.
Market sizing is the measurement of a product or service's potential market in a specific region or industry. It plays a vital role in creating effective marketing and business strategies because, by understanding it, a company can determine the potential revenue and target market that can be achieved, as well as evaluate the business opportunities that may exist in that market.
There are several types of market size commonly used in market analysis, including:
1. Total Addressable Market (TAM)
TAM represents the market size that includes all consumers who need or have a demand for a particular product or service in the market.0
2. Serviceable Available Market (SAM)
SAM is a portion of the TAM that a business can serve with its existing resources and capabilities.
3. Serviceable Obtainable Market (SOM)
SOM is the size of the target market calculated as a percentage of the total sales of a product or service in the intended market. SOM represents the business's position in the market compared to its competitors.
Simply put, TAM is the expectation, SAM is the projection, and SOM is the reality. Therefore, SOM is what matters most. TAM helps to show long-term market opportunities, but SOM is what will be achieved in the short term.
How to Measure or Calculate Market Size:
1. Top-Down Analysis
This method involves calculating the total market size based on available statistical data. The market size is then segmented according to the product or service being sold, and an estimate is made of the percentage of the total market that that product or service can reach.
2. Bottom-Up Analysis
This method can be used to measure market size by conducting in-depth market research. It doesn't rely solely on estimates or market trends, so the results obtained are more realistic, and the calculation of potential profits and losses is more accurate.
Accurate and realistic market sizing is crucial to the success of a company or business because it helps to understand the potential market and identify the opportunities and risks that may be faced. By understanding market sizing, a company can determine an effective marketing strategy.