Understanding your market size is a critical component of launching a business, introducing a new product or service, entering a new market, or developing your existing firm. Identifying the market size for your company helps you understand the market’s revenue and profitability potential, guides business planning and strategy formation, directs marketing efforts, manages revenue expectations, and guides targeting efforts to focus on more profitable segments.<\/p>\n\n\n\n
That is what we will be discussing in this article. By the end, you will learn how to estimate the market size for your product or service and determine the percentage of customers you can realistically capture from it.<\/p>\n\n\n\n
Total Addressable Market (“TAM”) refers to the size of the industry in which your product or service operates. If you own a business that provides services or products to corporations, your TAM would be the number of corporate organizations in Nigeria.<\/p>\n\n\n\n
There are two additional key terms to consider when analyzing TAM. After determining your TAM, the Serviceable Addressable Market (“SAM”) and the Serviceable Obtainable Market (“SOM”) are the next steps in narrowing down and determining the actual number of customers within the business’s reach.<\/p>\n\n\n\n
After determining the market for your product, you must understand the SAM, which is the fraction of the TAM that you can achieve given your current capabilities. For example, geographical limitations, customer segmentation, and other factors may have an impact on your SAM. Continuing with our example: if the business is based in Lagos, the SAM might be narrowed down to corporations in Lagos, and further limited if it can only serve Small and Medium-sized corporations.<\/p>\n\n\n\n
The final component is the Serviceable Obtainable Market, which is the percentage of the SAM that your company can obtain. This takes into account issues such as competition, customer preferences, alternative products\/services, and other considerations. To return to our example, when pursuing the SOM, the business must examine the level of competition and whether certain corporations already have in-house capabilities for the intended product or service.<\/p>\n\n\n\n
When analyzing your market size, never assume that the TAM is the maximum size that your company can capture. This implies a fundamental belief that your company will operate as a monopoly with no competition. This is rarely the case. If you use the TAM instead of the SOM in your business plan and revenue projections, you will make false revenue assumptions that will never be met.<\/p>\n\n\n\n
The Top-Down Approach and the Bottom-Up Approach are two popular methods for estimating market size.<\/p>\n\n\n\n
The Top-Down Approach entails using macro-level data to estimate the overall market size and then drilling down to the specific market segment for your product or service. Think of this as starting broad and narrowing to specific. The data used may come from industry research and reports (e.g., Agusto Research, Mordor Intelligence), as well as general information available online.<\/p>\n\n\n\n
The Bottom-Up Approach, on the other hand, estimates market size using specific customer data. Data can be gathered from existing customers, primary research, customer surveys, and other direct sources.<\/p>\n\n\n\n
The bottom-up approach might be preferred by established businesses with access to real-time customer data who want to get into more detail with fewer assumptions. However, for a new business with little or no data available, the top-down approach may be more appropriate, although there are constraints with data gathering that require heavy reliance on assumptions.<\/p>\n\n\n\n
Now, let\u2019s do a Back-of-the-Envelope analysis using the Top-Down Approach to estimate the market size for a new payroll and employee management software provider in Nigeria.<\/p>\n\n\n\n
The Total Addressable Market for this company would include all corporate organizations in Nigeria, estimated to be about 3.1 million, multiplied by an annual subscription value of \u20a6100,000 (One Hundred Thousand Naira), bringing it to \u20a6310,000,000,000 (Three Hundred and Ten Billion Naira). The target audience for this enterprise software would likely be medium and large-sized companies with a substantial number of employees. Assuming they make up 40% of the companies in Nigeria, our SAM would be \u20a6124,000,000,000 (One Hundred and Twenty-Four Billion Naira). Let\u2019s further assume that only 20% of those medium and large enterprises are willing to adopt technological solutions for payroll and employee management, our SAM reduces to \u20a624,800,000,000 (Twenty-Four Billion, Eight Hundred Million Naira). Assuming that the big players in the market like Seamless HR, Payday, Bento Africa, etc., have already captured 60% of this market, i.e., \u20a614,880,000,000 (Fourteen Billion, Eight Hundred Million Naira), our Serviceable Obtainable Market would be about \u20a69,920,000,000 (Nine Billion, Nine Hundred and Twenty Million Naira), which is the portion of the Total Addressable Market that this company can potentially capture.<\/p>\n\n\n\n
Understanding your market requires conducting market research and calculating market size. You gain insight into the market’s potential for growth and make strategic decisions\u2014whether to double down on efforts, expand into other segments, or exit the market entirely.<\/p>\n","protected":false},"excerpt":{"rendered":"
Understanding your market size is a critical component of launching a business, introducing a new product or service, entering a new market, or developing your existing firm. Identifying the market size for your company helps you understand the market’s revenue and profitability potential, guides business planning and strategy formation, directs marketing efforts, manages revenue expectations, and guides targeting efforts to focus on more profitable segments. That is what we will be discussing in this article. By the end, you will learn how to estimate the market size for your product or service and determine the percentage of customers you can realistically capture from it. Exploring Market Size Concepts: TAM, SAM, and SOM Total Addressable Market (“TAM”) refers to the size of the industry in which your product or service operates. If you own a business that provides services or products to corporations, your TAM would be the number of corporate organizations in Nigeria. There are two additional key terms to consider when analyzing TAM. After determining your TAM, the Serviceable Addressable Market (“SAM”) and the Serviceable Obtainable Market (“SOM”) are the next steps in narrowing down and determining the actual number of customers within the business’s reach. After determining the market for your product, you must understand the SAM, which is the fraction of the TAM that you can achieve given your current capabilities. For example, geographical limitations, customer segmentation, and other factors may have an impact on your SAM. Continuing with our example: if the business is based in Lagos, the SAM might be narrowed down to corporations in Lagos, and further limited if it can only serve Small and Medium-sized corporations. The final component is the Serviceable Obtainable Market, which is the percentage of the SAM that your company can obtain. This takes into account issues such as competition, customer preferences, alternative products\/services, and other considerations. To return to our example, when pursuing the SOM, the business must examine the level of competition and whether certain corporations already have in-house capabilities for the intended product or service. When analyzing your market size, never assume that the TAM is the maximum size that your company can capture. This implies a fundamental belief that your company will operate as a monopoly with no competition. This is rarely the case. If you use the TAM instead of the SOM in your business plan and revenue projections, you will make false revenue assumptions that will never be met. How to Estimate Market Size The Top-Down Approach and the Bottom-Up Approach are two popular methods for estimating market size. The Top-Down Approach entails using macro-level data to estimate the overall market size and then drilling down to the specific market segment for your product or service. Think of this as starting broad and narrowing to specific. The data used may come from industry research and reports (e.g., Agusto Research, Mordor Intelligence), as well as general information available online. The Bottom-Up Approach, on the other hand, estimates market size using specific customer data. Data can be gathered from existing customers, primary research, customer surveys, and other direct sources. The bottom-up approach might be preferred by established businesses with access to real-time customer data who want to get into more detail with fewer assumptions. However, for a new business with little or no data available, the top-down approach may be more appropriate, although there are constraints with data gathering that require heavy reliance on assumptions. Now, let\u2019s do a Back-of-the-Envelope analysis using the Top-Down Approach to estimate the market size for a new payroll and employee management software provider in Nigeria. The Total Addressable Market for this company would include all corporate organizations in Nigeria, estimated to be about 3.1 million, multiplied by an annual subscription value of \u20a6100,000 (One Hundred Thousand Naira), bringing it to \u20a6310,000,000,000 (Three Hundred and Ten Billion Naira). The target audience for this enterprise software would likely be medium and large-sized companies with a substantial number of employees. Assuming they make up 40% of the companies in Nigeria, our SAM would be \u20a6124,000,000,000 (One Hundred and Twenty-Four Billion Naira). Let\u2019s further assume that only 20% of those medium and large enterprises are willing to adopt technological solutions for payroll and employee management, our SAM reduces to \u20a624,800,000,000 (Twenty-Four Billion, Eight Hundred Million Naira). Assuming that the big players in the market like Seamless HR, Payday, Bento Africa, etc., have already captured 60% of this market, i.e., \u20a614,880,000,000 (Fourteen Billion, Eight Hundred Million Naira), our Serviceable Obtainable Market would be about \u20a69,920,000,000 (Nine Billion, Nine Hundred and Twenty Million Naira), which is the portion of the Total Addressable Market that this company can potentially capture. Understanding your market requires conducting market research and calculating market size. You gain insight into the market’s potential for growth and make strategic decisions\u2014whether to double down on efforts, expand into other segments, or exit the market entirely.<\/p>\n","protected":false},"author":1,"featured_media":174,"comment_status":"open","ping_status":"open","sticky":false,"template":"brizy-blank-template.php","format":"standard","meta":{"footnotes":""},"categories":[26],"tags":[41,29,59,42],"class_list":["post-163","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","tag-business-insights","tag-business-operations","tag-business-strategy","tag-smes"],"yoast_head":"\n