Understanding Market Sizing Analysis and Key Concepts

Introduction

Whether entering a new market or strategizing for growth in your current market, accurately evaluating the total market potential for a product or service provides critical data that guides strategic business planning and decisions. Using quantitative market sizing metrics allows companies to set growth goals grounded in reality, strategically prioritize initiatives and resource allocation, and track performance relative to the total addressable opportunity. In this post, we’ll explore some key market sizing concepts and how to leverage them to drive business success.

Defining Key Market Sizing Metrics

When assessing market size, there are three important metrics to evaluate:

• Total addressable market (TAM)
• Serviceable addressable market (SAM)
• Serviceable obtainable market (SOM)
  
  

We will explore each of these metrics in more detail below. 

Total Addressable Market (TAM)

This metric is the total market demand or universe of potential customers for a product or service within a defined geographic area. TAM represents the overall opportunity without applying any market or business constraints. This is typically the broadest level of market sizing as it seeks to quantify the entire target population for a business. 

For example, the TAM for a U.S.-based almond milk company, let’s call them “Almondoh,” would measure the total size of the milk substitute market. That’s right, Almondoh’s TAM would extend beyond almond milk to capture the demand for all milk substitutes. One reason Almondoh may want to cast such a wide net is to assess the share of the milk substitute industry taken by almond milk. There are wide-ranging actions that Almondoh could take if it finds other milk substitutes have a higher demand or more growth potential. We’ll come back to these actions later.

Although Almondoh may only sell almond milk in a few states, the TAM analysis for their market should be broader, measuring the total number of U.S. buyers and their projected annual spending across all milk substitutes. 

The information provided by the TAM would help Almondoh decide whether it’s worth venturing into more states, changing their production to produce a different product, or adding a product to their line. 

Serviceable Addressable Market (SAM)

The serviceable addressable market refers to the segment of the total addressable market that a business can realistically target and serve. Unlike a TAM, the SAM takes into account factors such as geography, customer demographics, and market saturation to narrow down the addressable opportunity.

Returning to our favorite almond milk company, Almondoh’s SAM would more narrowly quantify their market by focusing on the states they currently serve or could reasonably serve within the next fiscal year. Additionally, their SAM would focus on the market for their specific milk substitute, almond milk. 

Pairing the TAM and SAM results provides a wealth of useful data. The nested structure of these two analyses allows companies to identify their growth potential and the biggest impediments to their growth.

Serviceable Obtainable Market (SOM)

Lastly, the serviceable obtainable market describes the portion of the SAM that a business can realistically capture or serve based on its organizational and distribution constraints. SOM analyses take into account factors such as market share, marketing budget, pricing ability, competition, and product differentiation. One of the most important outputs from a SOM is a business’s current and expected market share relative to competitors.

A SOM analysis would typically pair Almondoh’s internal data with the SAM analysis to identify the share of the market they can realistically obtain. Among other metrics, Almondoh would use its marketing budget and distribution costs to identify the market penetration it can realistically obtain. By multiplying their expected market penetration (e.g., 10%) by the SAM, Almondoh can set realistic revenue expectations.

Together, TAM, SAM, and SOM provide a hierarchical perspective of the total market landscape, from broad potential opportunity down to what is realistically attainable by the business.

When to Apply TAM, SAM, and SOM

With each market sizing metric taking into account different factors, it’s important to know when to use each approach.

Total Addressable Market 

TAM analyses help gauge total market opportunity and possibilities in the early planning stages. Early planning stages not only include entry into a market but also expanding into new opportunities within your current market (e.g., Almondoh adding macadamia nut milk to their product line). By quantifying the full universe of potential customers, TAMs provide context for goal-setting and frames where the business fits into the broader landscape. Key questions TAM analyses help answer include:

1. Who could potentially be interested in our product/service?
2. How big is the total demand for our current and potential offerings?
   
   

Serviceable Attainable Market

SAM analyses more narrowly quantify the market potential of a company’s current offerings within their geographic limitations and help evaluate how much of the broader market the business can realistically target. This informs goal setting and strategic prioritization based on true addressable opportunity, allowing a company to answer questions like:

1. How much of the TAM can we viably serve?
2. Where can we cost-effectively reach potential customers?
3. Is it worth expanding the products and services we offer?
   
   

Serviceable Obtainable Market

SOM analyses track the current market share captured by the company relative to competitors, highlighting areas for potential business expansion and market share growth. Therefore, by conducting a SOM, a business can realistically answer the questions:

1. How does our market share compare to major competitors?
2. Which customer segments are we over/underperforming in relative to the competition?
3. What factors are preventing us from servicing the entire attainable market?

Benefits of Market Sizing Metrics

Leveraging market sizing metrics in business planning and strategic decision-making offers many benefits, including:

• Quantifying market opportunities.
• Informing strategies and investments.
• Facilitating goal setting.
• Tracking market share over time. 

Now, let's explore each benefit in more depth. 

Quantifies Market Opportunities

At the heart of accurate market sizing lies the ability to quantify market opportunities with precision. By delving into the TAM, businesses gain a comprehensive view of the entire market's potential demand. 

Let's consider Almondoh's situation. By evaluating the TAM of almond milk within the milk substitute market, they could discern whether almond milk's demand is on the rise compared to other substitutes. With this insight, Almondoh could effectively fine-tune its production capacity and marketing strategies to cater to the growing demand.

TAM analyses can also identify new markets by assessing where the demand is coming from. It may be the case that Almondoh has sufficiently met the almond milk demand in the Western and Southern regions of the U.S., and there is a new rising demand for milk alternatives in the East. If Almondoh solely focused on its yearly revenue as its metric for growth, it may wrongfully believe that the almond milk market is saturated. With the TAM revealing a rise in demand in the East, Almondoh can begin to ramp up sales in that region and calculate more realistic, and optimistic, revenue projections.

Informs Strategies and Investments

Accurate market sizing serves as a compass for strategic decision-making. It guides companies to focus their efforts where it matters most. 

For instance, if Almondoh finds that a particular region of the U.S. holds untapped potential in its SAM, it could strategically allocate resources for targeted marketing campaigns and distribution channels in that region. This ensures that their investments align with the segments that promise the highest return, maximizing their growth prospects.

Alternatively, let's say Almondoh discovers that young adults make up a sizeable portion of their SAM. Wisely, Almondoh has also conducted research on the top sales drivers for each age group, revealing that younger consumers value environmentally friendly products. Armed with this information, they could allocate resources to innovative packaging solutions that emphasize sustainability, effectively resonating with this segment. This strategic alignment not only enhances their market presence among environmentally conscious consumers but also increases the likelihood of securing brand loyalty within this demographic.

Facilitates Goal Setting

Precise market sizing fosters goal setting based on real-world potential. By analyzing the SAM, companies can set achievable objectives and avoid overestimating their reach. 

Let's return to Almondoh; imagine they uncover a sizable SAM among women between the ages of 18 and 34 who live in the Western region of the U.S.. First of all, this insight enables them to create specific growth objectives, such as increasing market share within this segment by a certain percentage over the next year. Second, Almondoh can create other research goals like identifying the top preferences and sales channels for this market segment to better target them and increase their market penetration. By aligning their goals with the actual segment potential, Almondoh can pursue realistic and attainable growth milestones.

Tracks Market Share Over Time

The journey doesn't end after initial market entry. Accurate market sizing allows companies to track their progress over time, ensuring they remain competitive and adaptive. By continuously monitoring the SOM, businesses can identify growth trends, shifts in consumer preferences, and the emergence of new competitors. 

In Almondoh's case, keeping a vigilant eye on their SOM in comparison to other milk substitute brands empowers them to adapt to changing consumer preferences and adjust their strategies to maintain or enhance their market share.

Suppose Almondoh notices that their SOM is gradually increasing as more consumers are shifting toward plant-based milk substitutes. This trend could prompt them to invest further in research and development to introduce new almond milk flavors and variants that cater to evolving taste preferences. 

Alternatively, by tracking market share over time, Almondoh can identify potential threats from new entrants in the market and proactively develop strategies to differentiate themselves and retain their market share.

Conclusion

Accurate market sizing is the cornerstone of strategic decision-making. By dissecting the market into TAM, SAM, and SOM, companies can navigate the competitive landscape with confidence. Understanding the benefits of precise market sizing—from quantifying market opportunities to informing strategies, facilitating goal setting, and tracking market share over time – ensures businesses are well-equipped to make informed, impactful decisions that lead to growth and success.

Is your organization looking to accurately assess its market size? Could your team benefit from a TAM, SAM, or SOM analysis? Contact us today to get started because, well, this is what we do!