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Market sizing

Understanding the waters in which your product or service will be sailing is obviously a must before embarking on any endeavour. But how vast are these waters? Are you hoping to cross an ocean, a sea or a bay? What are your capabilities and limitations? And what can you achieve? Nautical metaphors aside, market sizing is an exercise aimed at understanding the parameters of the market you are entering, where you stand, and how successful you can realistically hope to be.

Put simply, the size of a market is established by the total number of potential customers for a certain product or service and therefore by the total revenue one could generate. Understanding these parameters helps entrepreneurs decide which markets to focus on, being reasonably aware of financial potential and pre-existing limitations. Market sizing is often how investors decide whether a product or service makes for a good investment opportunity and it is also extremely useful when putting together a marketing strategy, as it informs which markets to target, by what means and with how much vigour.

Typically, market sizing starts by looking at the size of the largest relevant market and then, iteratively, breaking it down, based on assumptions, to a market size one can realistically target and potentially secure for a given product or service. This type of “top-down” market sizing often involves the use of the “TAM, SAM, SOM” method:

  • TAM – Total Addressable Market: The size of the largest possible market.

  • SAM – Serviceable Available Market: The portion of the TAM which fits your specific offering.

  • SOM – Serviceable Obtainable Market: The portion of the SAM you could realistically serve.

The larger figures (TAM and SAM) are often retrievable from economic market reports, governmental agency publications or scientific research papers. These “orders of magnitude” provide reasonable assumptions and perspectives to base the final SOM estimations on. This type of analysis requires some effort, so be prepared!

Market trends and projections can be found, for free, on market research websites. Demographic data is also readily available for download from many public institutions while your competitors pricing and provision schemes are advertised on their respective websites. All this information is essential for your market research!

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Look at what your competitors are doing…. What are they offering? At what price? What’s their market share? Simple web searches often return valuable information regarding the main players in any market.

To make things a bit more tangible, let’s assume you are interested in precision pig farming. A hypothetical example of a TAM, SAM, SOM approach for sizing this market would look as follows:

  • TAM – Total Addressable Market: The global precision livestock farming market was valued at €3.2 billion in 2021.

  • SAM – Serviceable Available Market: The innovation will initially focus on the EU market. Europe is predicted to hold a 30% share of the global precision livestock farming market in 2021. This implies a SAM of €960 million in 2021.

  • SOM – Serviceable Obtainable Market: There are over 2 million pig farmers in the EU, mainly rearing just a few animals alongside various other farming activities. However, a minority of them handle large businesses with impressive pig counts. These farms account for most of EU’s pigs –three in every four pigs is being reared by one of 150,000, or so, farmers on a specialised “large” pig farm. We will thus focus on the 150,000 specialised pig farmers and assume 150 of these (0.1%) could be targeted for initial commercialisation. Using this information and considering the price offerings of other pig management software providers – starting price: €462/year subscription – the SOM is evaluated at €69,300/year.

Figure 1: Graphical representation of the TAM, SAM, SOM method

Market sizing establishes a goal to aim for as well as an understanding of one’s target customers and just how many of them are necessary to stay operational and / or become successful. This also provides a “ballpark” for necessary accounting and financial projections. Based on this information, one can begin to tailor the offering to specific market needs or decide to pursue only a select few for their business potential!