Understanding the size of each customer segment is an important criterion for selecting your first market to enter as well as future follow-on market segments. What does market size mean? Well, if you look it up on the internet and read books dedicated to start ups, you are going to acquire a great deal of information on how to identify and size your market. Unfortunately, this information can be confusing and contradictory.
One of the more useful models provides entrepreneurs with a cascading approach where you start at the broadest definition of the market and then, peel back the layers, honing in on your market picture until you have identified the customer base you are most likely to reach in the early period of your venture. This model typically includes three layers, called Total Available Market (TAM), Served Available Market (SAM), and Share of Market (SOM).
Total Available Market (TAM) – happens to be defined in many different ways across articles, blogs, and books. Some authors define TAM as total available market or the total market demand for a product or service, while others refer to it as how many products would you sell if 100% of the market bought your product.
You fine similar mixed definitions for SAM – served available market versus served addressable market or segmented addressable market. From there you can read about SOM – served obtainable market or share of market. And if this isn’t confusing enough, don’t even try to figure out what target market or TM actually means. Within the TAM & SAM model divisions, TM typically refers to how many actual customer sales can you expect to achieve over a specified period of time. But this varies as well.
So an noted, this is a shame – taking a model that could really be useful for busy entrepreneurs and making it so confusing that it becomes useless as both an analytic device as well as a common way to communicate about market size so everyone can understand in the same way.
While we are not sure how to fix this for everyone, we will attempt to straighten it out for you, our students. Let’s start with some basic market discovery goals. If we go back to the overall venture discovery process, market research provides mostly secondary information about your business model assumptions. If done correctly, you can learn quite a bit about your potential customer, competitors, and revenue potential. When you are working to identify you customer segments for your business model, apply the following steps to help size your market.
Step 1. Brainstorm/identify top 5-6 customer segments experiencing the problem.
Step 2. Complete customer segment analysis for each segment, starting with details on customer profile (see worksheets for B2C, C2C, B2B). During this step, start with demographic data for each customer segment bounded by identified geographic area. Then search for market data that provides portion (percentages) of population that manifests identified lifestyle or behavior.
Step 3. Once customer profile for each segment is defined, begin bottom up analysis for each segment, thus calculating Total Available Market (TAM) & Served Available Market (SAM) by segment. This can be done by integrating any market data on purchasing behavior of similar products or optional solutions, this including competitors’ market share data. Then, extrapolate segment size by combining demographic/geographic data with percentages of population that manifest relevant behavior and/or purchasing patterns.
Step 4. Select your priority customer segment (beachhead) and determine Share of Market (SOM) you can realistically achieve in first 2-3 years.