When you’re a startup about to launch a new product, chances are that you’re going to want to make some kind of profit from it. Even if you’re not motivated by money, having a successful product means you’ll have profit to reinvest in your next project, and that allows you to keep doing what you love.
That’s why it’s so important to do your research before you launch, and one of the most important elements of this is to determine the size of your market. Your market, of course, is essentially your target audience – how many people match the description of your buyer persona?
This is crucial because it essentially gives you an ‘upper limit’ for how many units you can sell. Discounting people who place multiple orders, you’re not likely to sell more units than there are people who want to buy them.
Knowing the size of your market then tells you how much you could potentially earn depending on your COGS (Cost of Goods Sold) and other expenses. If the market is smaller than you thought, you may need to rethink your product, or alter your strategy, in order to increase your margins. Either way, it’s better to know before you invest too much time and money into the project!
TAM vs SAM vs Target Market
When defining your market size, you can basically break it down into three smaller groups. These are:
- TAM – Total Available Market
- SAM – Served Available Market
- Target Market
So what does that all mean?
Essentially, TAM tells you how many people you could possibly sell to. Theoretically, that means asking how many people are there on planet Earth, who could under some circumstance buy your product.
That’s not a particularly useful metric though, so most businesses are going to narrow it down. More likely, TAM might tell you how many males are there between the ages of X and Y. This is a quick number for telling people the underlying potential of that opportunity.
But of course, you’re not going to sell to every male between those ages, so now you need to think about the percentage of that market you can likely expect to reach with your marketing budget/ sales strategy. That number you’re left with is ‘SAM’.
SAM also takes your competition into account (you can also calculate SAM for a product inclusive of all competitors). Another term sometimes used here is ‘SOM’, which is ‘Serviceable Obtainable Market’, which is the percentage of the market that you’re realistically likely to reach. In other words, this might mean that SAM is how much you could potentially reach, and SOM is how much you probably will.
Finally, your ‘target market’ is the specific group you’re going after. What strategy are you going to use to achieve the biggest possible SAM using your limited resources? Who is your ideal candidate within the TAM for your idea?
Knowing all of this will help you come up with a more specific strategy and more realistic projections for your revenue and turnover. What’s more is that it can help you to grow and expand your business in the future. Perhaps as you grow in size you can start to reach out to a larger share of the market? For example, Alibaba reportedly still has the potential to increase its total addressable market by 40% according to the Chief Investment Officer of Forward Management.
In Steve Blanks “Startup Owners Manual,” he suggests using the bottom up estimate vs the top down estimate for figuring out your target market as it tends to be more realistic for startups. Here is a good article on explaining these in more detail with actual figures.
While these numbers are not entirely set in stone and may seem somewhat arbitrary, having a rough idea of your TAM, SAM and target audience can help you to create a much more effective strategy for your business moving forward, and is very much worth researching. You should always know how much revenue you can potentially achieve as well as your competitive market share.
Let us know in the comments how you determine your market size and be sure to sign up to the newsletter for more tips and advice!