The Wonderful Guide to Market Sizing

When you’re preparing to launch a new product, enter a new market, or quantifying your goals for an expansion, understanding market sizing is paramount to your success.

Put simply, market size is the total number of customers (and/or potential revenue of these consumers) who are potential buyers of your product. This figure can be measured in terms of the number of consumers, the total revenue value they represent, or the total number of transactions per year.

Quick Reference Glossary

Market Size: the net sum of sales of all players in a market or industry and the revenue they represent.

Total Addressable Market (TAM): The total potential market a company, organization, or entity can target. TAM is typically measured in terms of the dollar value of potential revenue to be earned.

Served Available Market (SAM): The segment of the total addressable market that businesses offering a particular solution can satisfy. These sub-markets are often limited by factors such as demographics, industry regulations, or location.

Share of Market (SOM): Also known as the “serviceable obtainable market”, SOM refers to the segment of the SAM that a business model is capable of actually serving. So, if SAM is the portion of the market your company can potentially reach, SOM refers to the set of customers within your SAM that can realistically be captured.

How to Conduct Market Sizing Research

Getting Started: Defining Your Market

The first step to creating an effective market sizing is to define the market in which you’ll be engaging. A few questions to think about before we get into the nitty-gritty details are:

• What kinds of customers are most likely to purchase my product?
• Are these consumers in any set geographical area? If so, where?
• Are there any demographic factors (age, income, etc) that can limit our market size?
• What are your competitors doing in the space? Do they hold a large portion of the market already?

Once you’ve thought through those questions (and a few of your own) the next steps are to identify and calculate the various market size segments you’ll need: TAM, SAM, and SOM.

How to Calculate Market Size

Calculating Total Addressable Market (TAM)

There are three methods used to calculate TAM: top down, bottom up, and value theory.

Top Down

• The top down approach works by starting with a universal data set (all consumers) and whittling it down to your target market by applying limiting factors (demographic, location, purchase behavior, etc).
• This method is very useful to validate an opportunity or quickly assess the size of a market, but may not provide the level of detail needed for an in-depth analysis.

Bottom Up

• Often regarded as the most accurate way to define TAM, bottom up involves taking current business data (sales revenue) and extrapolating it to the larger market.
• The bottom-up formula involves multiplying annual contract value by the volume of accounts in large enterprises (EE), mid-markets (MM), and small & medium-sized businesses (SMB).
• The formula is “TAM = SUM of (ACV x SMB #) + (ACV x MM #) + (ACV x EE #).”

Value Theory

• While the other two methods look at existing data, value theory is more abstract. We use this methodology when assessing the value of a new product or product improvement that hasn’t yet existed in the market.
• Being that there isn’t any market data for this product (yet), value theory calculations of market size are equal to the assumed price of your product times the total number of potential customers.
• Wonder Pro-Tip: If you can use a bottom up approach, we recommend going this route. If not, taking the time to do the research can be your most valuable asset in doing your market sizing.

Based on which method you choose, you’ll need to gather relevant information to make your calculations through either secondary or primary research.

Secondary research, otherwise known as desk research, involves searching through the public domain for information. The internet holds a wealth of free information including SEC filings, Census data, findings from the Bureau of Labor Statistics, as well as subscription based services that range from $29 an hour to thousands of dollars per report. The most important thing to remember with desk research is that there is a lot of outdated or incorrect information on the internet.

At Wonder, we’ve developed a system called the “Knowledge Assembly Line” that enables our analysts to effectively search the public domain for whatever it is our clients would like to know. We use multiple quality assurance measures and strict research reliability guidelines to ensure that the knowledge we’re sharing is helpful, actionable, and directly answers our client’s question.

As you embark down your own research rabbit hole, it’s very important that you take a moment to outline a sound research methodology of your own. This will help you avoid misinformation and gather correct, trustworthy findings.

Primary research involves gathering first-hand data and is often used to complement secondary research efforts.

Calculating Served Available Market (SAM)

TAM and SAM may seem similar but, unless your company holds a monopoly, they’re most likely going to be different. Measuring your serviceable available market allows you to set more realistic goals.

• Finding the size of your served available market involves narrowing down the TAM to the most specific set of customers that would benefit from your product. So if, for example, you sell performance athletic footwear, you’d need to exclude parts of the TAM that include revenue from work boots, dress shoes, etc.
• Once you have narrowed down your customer base, you’ll need to find the average annual revenue these kinds of customers spend in your given market and multiply the two figures together. Put simply the calculation is “(# of Customers) * (Annual Revenue)”
• Wonder Pro-Tip: Useful resources here include government white papers, industry reports, data from the Office of National Statistics (ONS), and traditional secondary research methods.

Calculating Share of Market (SOM)

Understanding what percent of the market your company holds gives you a snapshot of how much revenue you can earn and your standing in comparison to other competitors in the market.

To calculate SOM, you’ll need to look at information from both this year and last year. Using the years 2018 and 2019, the formula will look like this:

• Step One: (Revenue 2018 / SAM 2018). This gives you your SOM in 2018
• Step Two: (SOM 2018) * (SAM 2019). This gives you your SOM in 2019

Wonder’s Tip: Investigating close competitors and determining their annual revenue can lead to a more accurate market share estimation.

Now that you’ve performed these three market sizing calculations you have the data you need to start building your pitch deck, go-to-market strategy, or product innovations that will take your company to the next level!

Want to see market sizing in action? Here are a few examples from Wonder:

• Market Size of Employer Branding
• Market Size of Radiation Oncology Centers in the US
• Market Size of Boutique Fitness Centers in the US
• Market Size of the Online Footwear Industry

This piece is powered by Wonder, an on-demand knowledge service that allows you to gain unique insights to any question in as little as 24–48 hours.
Check out the original research here.

Originally published at https://www.blog.askwonder.com on November 8, 2019.