Market sizing helps businesses figure out if there's actually a crowd hungry for your product. It shows you where to find customers and how many of them are out there.
With a clear understanding of market size, companies can avoid creating products no one wants, targeting the wrong audience, or missing out on significant opportunities. Poor market sizing can lead to wasted resources, failed launches, and disappointed investors.
It's the difference between a product that languishes on shelves and one that flies off them.
For startups, good market sizing can be the golden ticket to funding. For big companies, it's the compass that guides new ventures.
Market sizing turns guesswork into measurable outcomes.
This is your ultimate guide to size your market and set your product up for success. Let’s jump in.
Understanding the basics of market sizing
Market sizing helps you get the full picture of your business landscape. It helps you spot opportunities, sidestep risks, and validate your ideas.
The market sizing process revolves around three key concepts - TAM, SAM, and SOM.
First, there's the Total Addressable Market (TAM). Think of it as the whole pie – everyone who could potentially buy your product.
Next is the Serviceable Available Market (SAM). This is the slice of the pie that your business can actually reach.
Finally, there's the Serviceable Obtainable Market (SOM). This is a bite of the slice – the customers that can realistically be won over (and hopefully it’s a generous bite!).
Defining your market
To start market sizing, you need a clear market definition. For TAM, consider the broadest possible market for the product. This could be based on revenue, units sold, potential customers or households. It's a "what if" scenario but grounded in real numbers.
For example, if you’re in the HR software space, the TAM might be the amount of revenue generated or potentially generated by payroll, talent management, recruitment, benefits administration, and employee engagement tools - estimated at about $15 billion.
For electric vehicles, the TAM might be all possible drivers on the road, or 240 million drivers in the U.S. today.
Narrowing down to SAM and SOM
After establishing TAM, the Serviceable Available Market, or SAM, is more focused. It involves looking at several factors like operational areas (local, regional, global), specific demographics or firmographics, and even attitudes or behaviors.
For that HR Software startup, the focus might be mid-sized businesses that require comprehensive HR solutions but may not have the same needs or budgets as large enterprises. Or for the electric car company, it could narrow down to buyers considering passenger battery EVs or plug-in hybrid EVs.
A serviceable obtainable market, or SOM, is someone a business can realistically reach and convince to buy.
It represents the market share realistically capturable, taking into account available resources, competition, and market conditions. A new electric car company might start with eco-conscious city dwellers where there are many charging stations. As regulations change and infrastructure grows, so does the SOM.
The HR software company might focus on tech companies with employees in multiple US cities, where there is a high demand for specialized HR solutions.
Gathering and analyzing data
Now, it’s time to dig into the numbers.
For TAM, you can often use public data like industry reports, census info, or other sources. But you'll probably need to conduct market research for SAM and SOM. This is because your business likely has it’s own definition of who the target audience is based on different variables like demographics, firmographics, attitudes and needs.
When crafting a survey to determine the SAM and SOM, be clear about who the target is. Use the right screening questions to find your people and make sure the sample looks like the potential market.
Ensuring data quality
Accurate market sizing numbers require high-quality data. This might involve paying more for better respondents or using data quality checks and bot checkers. The best data comes from responses from real potential customers, not people gaming the system.
Weighting your data
Sometimes, the survey respondents don’t quite match your target market when it comes to true population distributions. For example, we often see females completing surveys at a higher rate than males, or those age 55+ completing more surveys than those age 18-24. Weighting can make the data more representative.
It's like adjusting the balance on a scale. For example, if there are too many older respondents, dial down their influence on the results a bit, conversely, dial up the influence of the younger respondents if they are underrepresented. A market research expert can help you determine how much to weight the data while still getting accurate results.
A real-world example: Mill food recycler
A real-world example of market sizing comes from a food recycler product called Mill. The Mill team partnered with Numerious to help break down the market into TAM, SAM, SOM, and Early Evangelist households for investor pitches.
TAM included all US households as any home could technically own the Mill device. SAM included households open to products that would help them manage their household food waste. SOM consisted of people who found the Mill concept appealing and were open to purchase if the price were right. Early Evangelists were those willing to buy at the planned price point.
This data helped Mill secure significant Series A funding from investors, including Bill Gates's Breakthrough Energy and Google Ventures. Mill launched in January 2023 and made Fast Company's most innovative companies list in 2024.
Tips for effective market sizing
Here are some of my best tips for excellent market sizing:
Understand market dynamics
Flexibility makes a difference. Sometimes, you only need two metrics (TAM, SAM, or SOM) to answer business questions. The goal is to gather enough information to make smart product and market strategy decisions.
SOM can change over time as products gain acceptance or market conditions shift. Luxury or premium goods often see SOM expand during strong economic times and contract during downturns.
Avoiding bias in market sizing
Look out for leading questions in your surveys. Instead of asking, "Would you buy our amazing product?" try showing a few different alternatives or products in a similar competitive space and ask, "Which of the following products would you actually consider purchasing, given your needs and budget?".
An approach like this reveals the true market perspective, not just the one we hope to find. We also love a good “wisdom of the crowds” question - “What percentage of your friends and family do you think would buy this product?” This tends to result in a slightly more conservative estimate than a purchase likelihood question.
Understanding the adoption curve
Market sizing can show how a product might be adopted. Most new things start with a small group of early adopters. Then, it spreads to a broader audience. Understanding this curve helps set realistic growth expectations and can help advise marketing and production plans.
Mastering market sizing
Market sizing is a powerful tool for businesses of all sizes. The process informs smart decisions about products, marketing strategies, and growth plans. Accurate market sizing can provide a competitive edge for startups and industry giants.
Effective market sizing involves both big-picture thinking and attention to detail. Breaking down the market into TAM, SAM, and SOM allows companies to focus on the most relevant opportunities. High-quality data, appropriate weighting techniques, and a flexible approach make market sizing successful.
When implemented correctly, market sizing does more than just help avoid product flops. It can uncover hidden opportunities and pave the way for significant business wins. This strategic approach transforms market analysis from a guessing game into a robust foundation for a successful business.
Want to learn more? Watch the full Market Sizing webinar now.