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Clearly, identifying the viable markets and market segments for your products and/or services is essential to your company’s success. Regardless of the markets in which you operate, however, it is essential that you have an accurate knowledge of their size.
It’s probably safe to assume that everyone wants to do business in a large and fast-growing market. However, it is possible to make money in a niche or a nascent market. You can also be successful if you introduce a revolutionary product that is just the tonic for customers who are fleeing a declining market. The point is, you can make money in all types of markets.
How can you determine how large your target market is? There are several standard metrics you can use to measure markets.
- Total available market (TAM) – This is the total size of the market. It is also referred to as total addressable market.
- Served available market (SAM) – Also known as served addressable market, the SAM is the total size of the market that is currently being served, or sold to. It is a portion of the TAM, and therefore it is always smaller. For example, according to the research firm IDC, 659.8 million smartphones were shipped in 2012, up 33.5 percent from the 494.2 million units shipped in 2011.[i] Assuming all of these are sold, then the SAM is 659.8 million, plus the smartphones previously sold, minus the number taken out of service. A big number, but nothing compared with a potential TAM in the billions if every adult in the world owned one.
- Share of market (SOM) – More commonly referred to as market share, this is the percentage of the market that a given company owns.
- Market growth – This is the rate by which the TAM is growing. It is typically calculated on an annual basis and expressed as compound annual growth rate (CAGR, pronounced “ka-grr”).
Market sizing graph – composite TAM, SAM, SOM, and CAGR
You can obtain many of these numbers from analysts who follow your industry or product. If you are selling something new, you may need to extrapolate or combine research to create an approximation, or “comp,” of your market.
A bit of advice to those of you who create marketing plans: Never walk into the boardroom with only the TAM. From personal experience, I can tell you this is one of the fastest ways to get thrown out of said boardroom. You need to understand the market dynamics—what your competitors are doing, price pressures, the strength of your brand—better than that. Also, never say the following: “This market is so big; if we captured only one percent of it, we’d all be rich.” I know more than one venture capitalist who stops listening to your pitch at that point. No one goes into business to get a 1 percent share, and presenting this argument suggests that you don’t have a very sound strategy.
An accurate knowledge of market size is critical to understanding the dynamics of a market—current or new—and assessing whether there is room for growth. Good markets are typically large and have a gap between the TAM and the SAM. This gap represents sales opportunity for your business. Opportunity also arises when the vendor with the largest SOM is vulnerable and your company feels it can take away market share based on an advantage in your product, price, or distribution. Another strategy for stealing market share is aggressive promotion. One of the best examples of this strategy is the market share gained by online insurance companies such as GEICO and Progressive. With essentially the same product, offered for a bit less via direct sales as opposed to agents, aggressive promotion via television advertising enabled these companies to dramatically increase their market share. As of 2011, GEICO is the third largest auto insurance provider in the United States, and is growing at 7 percent, while the CAGR for the overall auto insurance market is only 1 percent.[ii] GEICO is stealing market share.
The best way to size markets is to perform both a top-down and a bottom-up analysis. Find analyst reports that provide the TAM, growth rate, and market share, if they are available. Then, balance that top-down approach with your own bottom-up calculations based on your price, manufacturing capacity, and sales reach.
[i] International Data Corporation. “Worldwide Smartphone 2012–2016 Forecast and Analysis,” March 2012.
[ii] “How GEICO Is Delivering Shareholder Value To Berkshire Hathaway,” Seeking Alpha, October 7, 2011, http://seekingalpha.com/article/298261-how-geico-is-delivering-shareholder-value-to-berkshire-hathaway