What is Market Size?
Simply put, market size refers to the total number of potential customers/buyers for a product or service and the revenue they may generate. The broad concept of “market sizing” is broken down further into the following sets in order to estimate what the total potential market is, vis-a-vis the realistic goals that the business can set by determining what is achievable and what can be potentially captured:
(i) TAM – Total Addressable Market
(ii) SAM – Serviceable Available Market
(iii) SOM – Serviceable Obtainable Market
What is ‘Total Addressable Market’ (TAM)?
TAM represents the total demand or revenue opportunity available for a product or service, in a specific market. It refers to the total market size without any consideration for competition or market share. TAM is an estimation of the maximum potential for a particular product or service if there were no constraints or limitations.
Remember: TAM represents the total market size!
What is ‘Serviceable Available Market’ (SAM)?
SAM is a subset of the TAM and represents the portion of the total market that a business can realistically target and serve with its products or services. It takes into account factors such as geographical restrictions, customer segmentation, and the company’s ability to reach and effectively serve a specific segment of the market.
Remember: SAM represents the market that is within the reach of a business given its resources, capabilities, and strategy.
What is ‘Serviceable Obtainable Market’ (SOM)?
SOM represents a portion of the SAM that a business can realistically capture or obtain. It takes into account the company’s competitive landscape, market share goals, and its ability to effectively position and differentiate itself in the market – i.e., the unique selling point of this business.
Remember: SOM represents the market share or percentage of the SAM that a business can potentially capture.
How is Market Sizing Determined?
Market sizing can be determined using either: (i) Top Down Approach; or (ii) Bottom Up Approach:
(i) Top Down Approach
The Top Down Approach starts with the overall market size (TAM) and then progressively narrows it down to estimate the target market or the company’s potential market share. This method typically utilizes existing industry reports, market research data, and macroeconomic indicators to make assumptions and calculations.
Steps for Top Down Approach :
- Identify Total Market Size (i.e. TAM) based on market research and publicly available information;
- Determine the relevant segments and target customer base for Company’s products and service out of the total market (i.e. SAM); and
- Estimate the percentage of serviceable market portion (SAM) that can be realistically captured and serviced (i.e. SOM).
When to adopt Top Down Approach: Useful and feasible when comprehensive and exhaustive industry data and market research reports are readily available.
(ii) Bottom Up Approach
When detailed market data or industry research reports are not readily or easily available, a Bottom Up Approach to market sizing can be followed. It is more granular in nature and starts with a data driven approach. A bottom up analysis is a reliable method because it relies on primary market research to calculate the TAM estimates. It typically uses existing data about current pricing and usage of a product.
Why to adopt Bottom Up Approach: The advantage of using a bottom up approach is that the company can explain why it selected certain customer segments and left out others. The company might be required to conduct its own market study and research for this purpose.
Formula and Examples: Calculation of TAM, SAM and SOM
Facts and Assumptions
Identify specific customer segments or target markets. Let’s consider three hypothetical segments – Segment A, Segment B, and Segment C:
| Particulars | A | B | C |
| Number of potential customers | 10,000 | 5,000 | 500 |
| Estimated average revenue per customer | $500 | $2,000 | $10,000 |
| Segment Market Size | $5,000,000 | $10,000,000 | $5,000,000 |
| TAM | $20,000,000 | ||
Calculation of segment market size: number of potential customers x average revenue per customer
Total market size = market size of Segment A + market size of Segment B + market size of Segment C.
Calculation of SAM and SOM
SAM – Represents the portion of TAM that a company can effectively target with its products of services.
SAM = TAM x (Market Penetration Percentage/100)
Market Penetration Percentage is the estimated percentage of the TAM that the business can realistically serve based on its resources and capabilities.
SOM – Represents the portion of the SAM that a business can realistically capture or obtain.
SOM = SAM x (Market Share Percentage/100)
Market Share Percentage is the estimated percentage of the SAM that the business can capture based on its competitive advantage, brand strength and market positioning.
Illustration: Mepto’s Market Size Analysis
This illustrative analysis provides a clear roadmap for Mepto (online grocery delivery startup) to strategically plan its market entry, marketing initiatives, and growth strategies within the competitive landscape of online grocery shopping in India:
| Particulars | % | Details |
| Target Cities – Major indian cities with high online shopping adoption | Mumbai, Delhi, Bangalore, Gurgaon, Noida and Hyderabad | |
| Estimated Urban households | 5 million | |
| Average Monthly Household Spend on Groceries | INR 6,000 | |
| Average Annual Household Spend on Groceries | INR 72,000 | |
| Annual Market Potential – Mepto’s TAM | 100% | INR 360 billion(5,000,000 x 72,000) |
| Online Shopping Penetration – Mepto’s SAM | 50% | INR 180 billion(10% of INR 360 billion) |
| Realistic Market Share (due to competition from players like BigBasket, BlinkIt, Swiggy Instamart and other quick commerce startups) Mepto’s SOM | 10% | INR 18 billion(10% of INR 180 billion) |
Conclusion
Market sizing is fundamentally, an analytical exercise to: (i) firstly determine the total available market size (TAM); (ii) secondly determine the serviceable market that can be realistically targeted (SAM); and (iii) lastly determine the serviceable obtainable market that can be realistically captured (SOM), by a business. This is a critical exercise to determine the viability of a business venture, the potential revenue and the existing competition that would impact the portion of the market size a particular business is able to achieve.
It is crucial that businesses understand the fundamentals of market sizing in order to effectively market their products and services.
Frequently Asked Questions on Market Size
1. What is market size, and why is it important?
Market size refers to the total number of potential customers and the revenue they might generate for a product or service. It’s vital for businesses to understand their target audience, estimate potential revenue, and set achievable growth goals.
2. What do TAM, SAM, and SOM stand for, and how do they differ?
- TAM (Total Addressable Market): Represents the total market demand for a product or service without any limitations.
- SAM (Serviceable Available Market): The portion of TAM that a business can realistically target based on its resources and strategy.
- SOM (Serviceable Obtainable Market): The share of SAM that a business can capture, considering its competitive positioning and market dynamics.
3. How is the Total Addressable Market (TAM) calculated?
TAM is calculated by multiplying the total number of potential customers by the average revenue per customer. It estimates the overall revenue opportunity for a market.
4. What is the significance of SAM in market sizing?
SAM helps businesses identify the realistic portion of the market they can target, factoring in geographical restrictions, customer segmentation, and operational capabilities.
5. What methods can be used for market sizing?
- Top-Down Approach: Starts with the overall market size (TAM) and narrows it down to SAM and SOM using market reports and existing data.
- Bottom-Up Approach: Builds estimates from primary data, focusing on detailed insights about customer segments and pricing.
6. Which approach—Top-Down or Bottom-Up—is better for market sizing?
- Use the Top-Down Approach when comprehensive industry data is available.
- Opt for the Bottom-Up Approach when detailed market research is needed, as it provides granular insights and data-driven estimates.
7. How is the Serviceable Obtainable Market (SOM) determined?
SOM is calculated by applying a company’s market share percentage to the SAM. This calculation considers competitive factors, brand strength, and the business’s positioning.
8. Can you provide an example of TAM, SAM, and SOM calculation?
Consider a grocery delivery startup targeting urban households:
- TAM: Total households × annual spend on groceries.
- SAM: TAM × online shopping penetration percentage.
- SOM: SAM × expected market share percentage.
9. Why is market sizing critical for businesses?
Market sizing helps in:
Assessing competition and identifying target customer segments.
Evaluating the feasibility of a business venture.
Understanding potential revenue opportunities.