We often talk about customer pain and how to identify them, value offer and your solution as a startup. But we often see many entrepreneurs who, because they believe too much in their idea, end up not creating a detailed study of market size and the real possibilities of business growth.
We still see those who scale their market from a gigantic and unreal number, which does not reflect the real business opportunity. In a meeting with investors, for example, a poorly sized market number creates a lack of confidence and, well, we know where that leads.
Therefore, we will teach in this post how to size your market according to 3 parameters indicated by Sequoia Capital, one of the largest Venture Capitals in the world:
- Total Market (TAM)
- Addressable Market (SAM)
- Accessible Market (SOM)
Why not just show the market size?
Despite being an important piece of information, the market size helps little when it comes to forecasting the company's growth and revenue. Because it is a very large number, it is difficult to understand what part of that market is necessary for the company to maintain and profit, let alone how difficult it is to achieve this percentage.
Your market size is hardly the absolute market in which you operate. Imagine you have an education company. It is practically impossible for you to be able to serve all the players in this market, in its various segments and peculiarities. So, for a more accurate estimate, you must understand what part of that market you can actually operate.
How to scale your market?
Total Market (TAM)
Within this huge market potential, how many can actually use your product? How much does that mean financially? To create this number, combine the revenue or unit sales of all companies in a specific market.
We take the example of Marcelo Toledo's Blog to facilitate understanding: Let's say that 200 million computers are sold per year, at U$1,000 dollars each. In this case, the TAM would be 200 billion dollars. It turns out that the computer market is very large, certainly much larger than you would ever get involved even though it is very large. It involves new and used computers, desktops, laptops, netbooks, etc.
Does it make sense for you to use all these numbers? You may want to exclude what is out of your focus.
Addressable Market (SAM)
The addressable market is a slice of TAM, which you can really reach in the coming years. Take into account regionalization, market growth, and the specifics of your product. Using the same example above, if you are going to work with high-end computers, for example, this could represent 15% from TAM, because the minority of buyers are looking for computers like that. SAM in this case would be 30 billion dollars.
Accessible Market (SOM)
SOUND is the realistic forecast of acquisition of part of your addressable market, considering the competition, location, distribution and sales channels and any other market influences.
It is important to remember that all information about the forecast of market acquisition must be completely based on your business strategy and must contain data on how you intend to reach that market share.
The definition of TAM, SAM and SOM, basically consists of find which market shares you will be able to reach. They will never be the same size, because for a startup there are several obstacles to growth, and these barriers must be clear when dimensioning the market.