When I talked with business owners, I found that they easily overestimated or underestimated the market size of their business. The reason is that they tend to make estimates based on their personal perceptions which are subjective. Understanding market potential is critical when launching new products and services, or diversifying your business. Important and costly decisions require data support, and the boss should use all available market research tools to comprehensively estimate the potential market size.

Market sizing is the use of evidence-based estimates to identify potential markets and sales revenue. Whether it is a start-up or a new market, it is necessary to calculate the total market size that can be obtained.

Calculating market size is crucial because:

• It assists enterprises in estimating potential profits of new products, new services or new businesses
• It assists investors to make a decision whether to invest in a certain business
• It helps formulating marketing strategies and find out the needs and potential of the core market
• According to the enterprise development strategy, recruit suitable talents

The market sizing analysis involves multiple metrics including TAM, SAM, and SOM. The explanation and calculation method of each indicator will be introduced in detail below.

Total Addressable Market (TAM)

TAM refers to the entire potential value of the overall market. Generally speaking, a company is often unable to monopolize the whole market. TAM establishes the framework of the overall market potential. TAM is calculated by adding up all product sales for the entire market.

Serviceable Available Market (SAM)

SAM refers to the specific potential audience of a product or service. This is the maximum market value that the company can capture in the target market. SAM is calculated by adding up the sales of all relevant products in the target market. If the business of the enterprise is online shopping, it is the sum of the sales figures of online shopping-related products.

Serviceable & Obtainable Market (SOM)

SOM, also known as “Share of Market,” represents the percentage of SAM that a company aims to acquire. The way to calculate SOM is to divide the previous year’s turnover by the previous year’s SAM to get the company’s market share. Then, multiply the market share by the current year’s SAM value.

Comprehensive estimation of market size

In addition to the above market size estimation methods, business owners can also refer to different sources of information and combine citations to complement each other. These include:

• Primary and secondary research: search online to find relevant market information articles, case studies, white papers, product release announcements, etc.
• Financial Statements: Listed companies must publish financial statements to the public. Make full use of these public information to understand the market status and competitors’ business plans
• Market research tools: Market research comes in different forms. Companies may consider hiring a market research company to gain insight into market dynamics
• Interviews: Talk to people in the industry to understand their view on the market potential, customers and challenges

Conclusion: speak with data

Properly estimating market size requires data insight. Understanding TAM, SAM, and SOM can help you build an effective strategy, making key decisions about investing or not, potential growth opportunities, marketing strategies, and more. Using data to speak and accurately estimating the market size will help companies make wise decisions and avoid unnecessary risks.