Chasing Scale: Market Research and Market Sizing

So you got a great idea? How can you bring it to life and realize it? I will try to uncover it through a series of articles to help build the dream.

Now you may be the next Steve Jobs — where you create your own market, but that is certainly the exception rather than the rule. So what should you do?

Well first things first, it always starts with understanding the market you intend to serve — Market Research.

Key questions to start digging into:

1. How big is the market you are chasing after?
2. Who are the key players?
3. What are the industry dynamics?
4. What are the preferences, needs and wants of the target consumers?

Secondary research such as desk research is useful in many instances, particularly in industries where data and information is readily available. However, most often in emerging and frontier markets, such information is lacking and therefore, you may have to resort to conducting your own primary research. You may do so by speaking to professionals and practitioners in the industry who can provide insightful information based on their experience and knowledge. Another option is to engage a market research firm or university student groups which often provides a cheaper option to conduct surveys, and gather data from potential customers in the target market to understand their preferences, needs and wants. Data will always be amongst your best friends in this journey!

The best practice, if time and resources permit, is to go out yourself along with your co-founders and do surveys, interviews, focus groups etc. to get a first-hand feel from the market and its customers. There is something rich and unique about personal interaction and body language clues. In my experience, whenever I have gone out and done research myself or with my team I have always felt more enlightened and enriched with the information collected first-hand as compared to reading data and statistics compiled in a report.

Beyond getting consumer data and information, further research should be done to understand the dynamics at play here, including the following:

1. How much market share do the key players in the industry have?
2. What are their strengths and/or competitive advantages?
3. Is the industry fragmented or concentrated in few players?
4. What are the barriers to entry?
5. Are sales and marketing strategies primarily online or offline?
6. How do government regulations impact the industry?

Market Sizing

I cannot stress enough on the importance of Market Sizing. It is crucial to understand this from the onset. A startup should effectively determine how big the potential market actually is, even in an ideal world, if they were to capture the entire market how much they would and could they in fact capture. This figure will help drive the numbers, particularly in the fundraising plan and financial model (a topic which I will cover later).

Key question to answer is how big is the market we are entering or competing in? Let’s break it down into Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM)

TAM: Total Addressable Market

TAM is the total market potential for your product. This is including every customer in your universe who could buy your product, regardless of the competition in the market.

It can be defined as the overall revenue opportunity that is available to a product or service if 100% market share was achieved regardless of resource constraints.

SAM: Serviceable Addressable Market

SAM is the portion of the market that you can acquire. For example, your product may only be available in one language, so your SAM would be the subset of the TAM that speaks the language that your product is developed for. Similarly, if you can only serve a particular geographical area due to your logistics constraints, the SAM would be the subset of the TAM to which your product/service can be reached. This is the market value keeping in mind the demand for your type of products/services within your geographical or physical reach.

Unless you’re a monopoly, you most likely can’t capture the TAM for your product or service. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your product or service. That’s why it’s crucial to estimate your SAM to determine how many consumers (or $ value) fall in this category. To calculate your serviceable addressable market, count up all the potential customers that would be a good fit for your business and multiply that number by the average annual revenue of these types of customers in your market.

SOM: Serviceable Obtainable Market

SOM is really the segment which you are going after in your business plan, generally speaking in relation to the funding you are raising. Chances are that you are not going to take 50% market share of the SAM within your first year of operations. Therefore your SOM needs to be a reasonable fraction of your SAM. This is the market size which you can realistically serve given the geographical reach, product limitations, marketing capacity, logistics, and other resources which will be available to you.

If you can deliver SOM in the time you are projecting in your business plan, then you gain a lot of credibility. You might be able to increase your market share and reach a more important penetration of the SAM over time, which helps in achieving the dream — CHASING SCALE.