Chapter 1.4: Determining Market Size
June 24, 2020
There are three things you need to know when determining your market size.
Don’t let these terms scare you, by the time you finish reading the chapter, I will have explained them in depth along with showing you step by step how to calculate them.
TAM stands for total addressable market. This is just a fancy way of saying; What is the potential of your product?
Think of it in these terms;
How well can your product do on the market?
What is the most amount of success that you can achieve?
Examples of success being:
How much money can you make?
How many people can you get to use your product?
How many followers can you gain?
SAM or service available market, refers to the proportion of the market that fits you or your product. Envision who you could sell your product to within the year?
Which people are going to buy your product?
Which groups are your product(s) limited to?
-Narrow down your market and who you can sell to. Be as specific as possible.
SOM, service obtainable market, represents the portion of the market you can reach. You’re not able to reach the entire market, so here you focus on who you could sell to right now, or people who have access to your product or service at this very moment.
-This is where the demographic data you’ve compiled from your MVP comes into play.
Together, TAM, SAM and SOM determine who buys your product and in what quantities.
Let me make it clear that in this beginning stage, your product is going to take time to become what you envision it. And even then, it’ll never be an exact copy of what you want it to be. You need to learn how to adapt to the needs of your customers and adjust your product to viability. In reality, you won’t know shit about your product or what needs to be changed until you have people using it.
Right now, you don’t want to worry about profitability yet, you just need to know if your product works. Find a price that makes sense, where there is room for margins and is affordable to the end user.
Now let’s figure out how to find your TAM, SAM, and SOM.
In order to find your TAM:
1. You want to start by looking at the range of your clientele
Ask yourself; Who can you service potentially?
Are you servicing millennials? Certain income brackets? Specific industries?
What’s the number of people that fall into your range of clientele?
Here you are looking for a specific number
This number is the total amount of people you could service to
2. Use websites like; https://www.ibisworld.com/ to find your number of potential customers
IBS World provides you with data found in different industry reports
The reports hold information pertaining to statistics, finance, companies in the industry your product is in
Gives you solid numbers to the amount of clients/buyers in your market
Management consulting companies such as McKinsey/ Bain also have a lot of information on the buyers of different industries
3. Using the number you found above (the amount of customers you can reach), find out how much revenue you can generate
Using the number from above, you’re going to use the TAM formula to quantify your total potential revenue
The formula is; total number of potential clients x what you’re charging for your service
Example: You are providing a service to hairstylists that cost $5/month. Your TAM would be; total number of hairstylists in the US or globally (depends on your product or service) and multiply that by $5.
Let’s say the number of hairstylists available in the US(where your product is sold) is 10,000
10,000 X $5 =$50,000
If every hairstylist in the US was buying your product, you would make $50,000
Start by putting your potential clients into different groups based on specific factors that influence their likelihood to buy your product
Example; from demographic data you’ve compiled, you break up your number of hairstylists by income. Brackets include; those making less than $50,000 a year, those making $50,000 - $100,000, those making $100,000+
As your product is today, figure out which group is buying into your product.
Ex; you assume you are not going to sell to anyone who makes less than $100,000
Look up what % makes up the said group you are selling to
Ex; What percentage of hairstylists make $100,000+, we’ll say it’s 12%
You can find this information using McKinsey/ Bain/ IBIS World
Remember you are focusing on a subgroup within the broad range of people you are potentially selling to
Take the total number of the percentage of the subgroup, in US or globally, and multiply it by the amount you are charging for your product
Ex; 1,200 hairstylists (12% of 10,000 hairstylists, which make over $100,000) x $5/month (what you're charging)= $6,000
You could make $6,000 by selling to this specific market of buyers
Obviously, not every hairstylist in the US can buy your product, so you're being more realistic to who you can sell too and the actual amount of money you could make
What is your product today and who can benefit from it now
Think in terms of; how big is the pain that you're solving for?
How willing are people to buy your product?
Above, you narrowed down your buyers market to a specific subgroup
Hairstylists that make $100,000+
From the group you are selling to, ask on a scale of 1-5, how big is the pain that you are solving for?
Focus on the portion that says 4 or higher.
Take the percentage of those that say 4 or higher.
You don’t need a huge sample set, 30 reponses minimum is fine.
What percent of that 30 or those surveyed say 4 or higher.
Ex; 25% of the 30 said their pain was 4 or higher
Take that percent then multiply it by the total number of individuals in the subgroup
Hairstylists that make over $100K+
1,200 x 25% = 300
Think of these people as forsure buyers
Then multiply that number by how much you are charging to get to SOM
300 x $5 = $1,500
At this very moment, this is the amount you can make
If you are having trouble finding information for SAM and SOM, you can directly ask the market you are selling to. All you need is a group of about 30 to figure out the necessary data. And always remember, ask don’t guess.
If your potential buyers don’t want to tell you for free, incentivise them in a way that you can afford and that brings some kind of value to the user. Money is always great, but it can always be something else. Be creative.