Product Management 101: #32 Market Sizing

Understanding Market Sizing in Product Management: A Guide to TAM, SAM, SOM, and More

Market sizing is a fundamental aspect of product management and business strategy. It involves estimating the potential market for a product or service, which is crucial for making informed decisions about product development, marketing, and sales strategies. This blog post will explore the concepts of Total Addressable Market (TAM), Serviceable Available Market (SAM), Serviceable Obtainable Market (SOM), other market sizing methods, the steps to estimate market size, what and who is needed, the benefits, and provide real-world examples.

TAM, SAM, SOM: The Core of Market Sizing

1. Total Addressable Market (TAM): TAM represents the total market demand for a product or service. It's the maximum amount of revenue a business could achieve if it had 100% market share.Example: Suppose you're launching a new fitness app. The TAM would be the total global revenue from all fitness apps.
2. Serviceable Available Market (SAM): SAM is the segment of the TAM targeted by your products or services which is within your geographical reach or distribution network.Example: If your fitness app is only available in the U.S., the SAM would be the U.S. revenue for fitness apps.
3. Serviceable Obtainable Market (SOM): SOM is the portion of SAM that you can capture. It considers your capacity, resources, and the competition.Example: If you estimate that your fitness app can capture 10% of the U.S. market in the first year, that’s your SOM.

Other Methods of Market Sizing

• Top-Down Approach: Starts with a broad industry figure and narrows down to the relevant market segment.
• Bottom-Up Approach: Builds the market size estimate from individual customer data, like average revenue per user.
• Value-Theory Method: Estimates market size based on the perceived value to customers and the price they might be willing to pay.

Steps to Estimate Market Size

1. Define the Market: Understand and define the market you are targeting, including geographical and demographic segmentation.
2. Choose the Method: Select the appropriate market sizing method (TAM, SAM, SOM, top-down, bottom-up, value-theory).
3. Gather Data: Collect data through market research, industry reports, surveys, and customer interviews.
4. Analyze Competitors: Assess the market share and size of existing competitors to understand your potential market position.
5. Estimate Revenue: Use the collected data to estimate the total potential revenue (for TAM, SAM, SOM).

What and Who is Needed

• Market Analysts: Experts in data gathering and analysis.
• Industry Reports: Reliable sources of secondary data.
• Market Research Teams: For conducting surveys and customer interviews.
• Sales and Marketing Teams: For insights into customer preferences and behavior.
• Financial Analysts: For revenue projection and business modeling.

Benefits of Market Sizing

• Informs Strategic Decisions: Helps in setting realistic goals and crafting strategies.
• Investor Confidence: Attracts investors by showcasing market potential.
• Resource Allocation: Guides in allocating resources efficiently.
• Risk Mitigation: Understands market risks and competition.

Real-World Example

Let's consider a company, “HealthTrack,” launching a wearable fitness tracker:

• TAM: The global market for wearable fitness devices.
• SAM: The market for wearable fitness devices in North America, as HealthTrack initially plans to launch only in this region.
• SOM: HealthTrack expects to capture 15% of the North American market in the first three years, considering its production capacity and marketing strategy.

Conclusion

Market sizing is more than just a set of numbers. It’s an essential exercise that guides a product’s journey from conception to market dominance. By understanding TAM, SAM, SOM, and other methods, businesses can make strategic decisions, allocate resources wisely, and set achievable targets. Remember, the accuracy of your market size estimate can significantly impact the success of your product.

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