Understanding Market Sizing: A Key to Unlocking Business Success
Market sizing is a critical component of business and strategy planning. It involves estimating the size of a potential market, identifying target customers, and determining the feasibility of capturing a significant share of that market. However, many businesses approach market sizing in a way that is overly broad and optimistic, leading to disappointment and failure.
The Pitfalls of Overly Broad Market Assessments
When businesses assume that their target market is everyone, they set themselves up for failure. This approach ignores the complexities of the market and the diverse needs of potential customers. It also leads to unrealistic expectations and a lack of focus.
A More Niche-Focused Approach
To avoid these pitfalls, businesses should adopt a more niche-focused approach to market sizing. This involves identifying a specific segment of the market and tailoring products or services to meet the unique needs of that segment. By doing so, businesses can differentiate themselves from competitors and establish a strong market presence.
The TAM/SAM/SOM Model
One useful framework for market sizing is the TAM/SAM/SOM model. This model involves estimating the total addressable market (TAM), the serviceable available market (SAM), and the serviceable obtainable market (SOM).
- Total Addressable Market (TAM): The total potential market for a product or service.
- Serviceable Available Market (SAM): The portion of the TAM that a business can realistically target based on its resources and capabilities.
- Serviceable Obtainable Market (SOM): The portion of the SAM that a business can realistically capture based on its competitive advantages and market conditions.
Case Study: Applying the TAM/SAM/SOM Model
Let’s consider a case study of a business that wants to develop a payroll management app for small and medium-sized enterprises (SMEs) in the European Union. Using the TAM/SAM/SOM model, the business estimates that:
- TAM: There are approximately 23 million SMEs in the EU, with 10% of them having more than 100 employees.
- SAM: The business targets SMEs with 100-250 employees in France, which represents a potential market of 3,700 companies.
- SOM: The business aims to capture 70% of the SAM, which represents a potential market of 2,590 companies.
Key Takeaways
By applying the TAM/SAM/SOM model, businesses can gain valuable insights into their target market and develop a more focused marketing strategy. Key takeaways from this approach include:
- Niche down: Identify a specific segment of the market and tailor products or services to meet the unique needs of that segment.
- Focus on the SOM: Prioritize the portion of the market that a business can realistically capture based on its competitive advantages and market conditions.
- Iterate and refine: Continuously refine market sizing estimates based on new data and market conditions.
By adopting a more niche-focused approach to market sizing, businesses can increase their chances of success and establish a strong market presence.