Market Sizing Analysis Overview
For many of our clients, it is essential they understand the size of their market. Measuring the size of a market typically comes in three flavors: Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM).
Let’s briefly review each flavor, and then the rest of the document will be dedicated to collecting and analyzing market sizing data.
TAM, SAM, and SOMs differ in the following ways:
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TAM (Total Addressable Market) refers to the total market demand for a product or service, assuming there are no competitive barriers. In other words, TAM represents the maximum potential revenue a business can generate if it captures the entire market. If this were true, everyone who purchases the product category would be doing so from one business.
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SAM (Serviceable Available Market) represents the portion of the TAM that a business can realistically target with its products or services. SAM takes into account factors such as geography, customer demographics, and market saturation.
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SOM (Serviceable Obtainable Market) refers to the portion of the SAM that a business can realistically capture or serve. SOM takes into account factors such as market share, competition, and product differentiation.
Based on these brief definitions, it may be clear that TAM, SAM, and SOM are a funnel. In other words, the size of the market and expected revenue should decrease or taper at each step.
Let’s say that Oatly approaches us to do a market sizing analysis for the US. The TAM would assess the total demand for all milk alternatives (e.g., soy, oat, cashew, etc.) in the US. We would calculate the TAM by taking a representative sample of the US and seeing what percentage buys milk alternatives and the typical yearly expenditure (lots more details on this process below). The TAM will inform Oatly of the total size of the milk alternative market. This information could aid their decision to add a different milk alternative to their products. The SAM is more specific and will assess Americans’ yearly expenditure on Oat milk. To be clear, the goal is not to assess buyers of Oatly products but rather Oat milk more generally. By comparing their annual revenue to the SAM, Oatly can see what percentage of the serviceable market they currently serve.
The SOM pairs Oatly’s internal sales data with the SAM to identify the share of the market they can realistically obtain. Often a company’s marketing budget and distribution costs are used to identify the market penetration they expect to have. Other companies take a more theoretical approach and say they believe they can realistically serve 10% of the serviceable market. In this scenario, the SOM would be 10% of the SAM.
There are five broad research questions that would call for a TAM, SAM, or SOM.
Clients need to evaluate the size of the market they are targeting and assess whether it is worth investing in. This may be needed when launching a new product or entering a new market.
Example question from the client: “We are debating whether we should start selling higher-end dresses or stick to our more affordable, everyday wear. Can you help us figure out the market size for high-end dresses and the possible revenue we could generate?”
Clients need to segment their target market by identifying the most lucrative customer groups to target.
Example question from the client: “We are not sure how to focus our advertising efforts. Can you help us identify the customers who are willing to pay the most for our product?”
Clients need to understand their competition and evaluate their market position. Specifically, questions can be added to the SAM to assess product spending by brand. This information can be used to project the market distribution by company. This is mostly useful if current revenue data is not publicly available.
Example question from the client: “We need to tell our stakeholders where we currently rank in the high-end dress market. Can you help us identify our biggest competitors?”
Clients need to make informed decisions about how to allocate resources such as marketing and sales budgets.
Example question from the client: “Currently, we are selling shoes, dresses, and jewelry, but given rising production costs, we aren’t sure whether we should continue to sell all three. Between shoes, dresses, and jewelry, which has the lowest revenue potential?”
Clients need help creating realistic and achievable revenue goals for a period of time.
Example question from the client: “Given current market conditions, what revenue can we realistically expect for our high-end dresses?”
While there are many situations when a client would like to run a market sizing analysis (TAM, SAM, and SOM), we will focus on two popular client objectives for the examples below: 1) Launching a new product and 2) Entering a new market.
When launching a new product, knowing the TAM is important to assess the size of the market opportunity. Knowing the SAM is useful for identifying the most relevant customer groups. Knowing the SOM is helpful in estimating the market share that the business can realistically capture and setting sales targets.
When entering a new market, knowing the TAM is important to evaluate the potential revenue that can be generated. Knowing the SAM is useful for understanding market segmentation and identifying the most profitable customer groups. Knowing the SOM is helpful in assessing the competition and estimating the market share that the business can realistically capture.