TAM/SAM/SOM what? How to perform a market sizing for your business
A business is supposed to generate revenues and make money. This revenue potential depends on the size of the market, that's why new business need to estimate the potential market size they will serve. Investors will also look at investing in startups that cover interesting market. Interesting market usually mean large, growing markets that will be big in the next years.
What are Market Sizing and Growth?
Market sizing is the estimation of the potential market size for your business. The market size represents the potential amount of sales per year for your solutions.
The growth indicates the percentage by which the market will increase every year.
Why are Market Sizing and Growth important?
A market size shows the limits of the market and an upper limit to potential revenues (your revenues will be a small percentage of the market size). Thus, it gives directions into what kind of revenues a company might expect.
A market size and growth indicate the attractiveness of a market. Investors won't invest in declining markets...
Investors look for markets that can be big in the next few years
How to look at Market Sizing and Growth?
Generally, a common framework for calculating the market size is the TAM/SAM/SOM (Framework: TAM/SAM/SOM).
It allows you to look at the overall market (TAM), your specific target market (SAM) and the market share you can get of the SAM (SOM).
However, you can be faced with two different situations:
Entering an existing market: You are entering an existing market in which customers are already buying similar products/services. Either your product is better than the existing ones, or it replaces existing products.
Entering a new market: You are creating a new market in which people are not yet buying similar products/services. Either you are making existing types of products accessible to a new type of customers or you are creating a revolutionary new product for new types of customers.
Your market sizing approach will be different in each of the cases.
Entering an existing market
When entering an existing market, there should be enough data available on the industry/market size online, and you can further drill it down to your particular segments. So, your approach will be "Top-Down". You can start by researching the global amount of yearly sales in your industry/market (TAM). You can then calculate more specifically which part of this TAM goes to your specific product types, target customers or geographic coverage (SAM). Finally, you can estimate what percentage of this SAM you can capture for your business.
Note that even with existing markets, sometimes it can be hard to find data online, especially more specific segmented data since the reports can cost up to CHF 10'000. In this case, it is more pragmatic to make a type two calculation.
Entering a new market
When entering a new market, there is no available data and you will need to estimate the number of potential customers for your business and their average yearly spending. Your approach will be slightly different, it will be "Bottom-up". In this case, it is more pragmatic to only show the SAM. The way to calculate it is by estimating the number of potential customers in your target group and multiplying it by the average spending of this target customer.
One thing worth mentioning: these approaches don't exclude one another! The best is to do online research and your estimation to truly understand the numbers.