Market size is a key component of strategic marketing planning. Knowledge of the size of your target market allows you to fully assess opportunities and accurately plan your approach and your investments, wisely.

Calculating market size accurately, can be a challenge, so it’s important to be clear on what you are measuring. Variables are often dynamic, so they must be clearly defined. Size can also be based on consumption or production figures, so it is important to know what approach you will take.

We have to undertake market survey, collect data from various sources, gain critical customer feedback (existing as well as potential).

• What is the level of growth in the market? How has the market changed in the last couple of years? Is it shrinking which may require you to apply caution to any expansion plans or is it growing?
• What time period are you looking at? Market sizing is usually assumed for a period of one year, but you could look at any timeframe that suits your business.
• What geographic regions does your market sizing cover? Are you selling locally, nationally or internationally.
• What issues are affecting the market? Is there anything, such as regulations, that might provide barriers to the market, or factors that might change buying habits in the future?

Market size is generally calculated under following heads:

PAM (Potential Available Market) — represents the global market of these goods and services without any restrictions of geography and other factors.

TAM (Total Addressable/Available Market)– shows how many customers in the core market are in need of your goods or services (they are not necessarily can afford these products but have a need in them) in the same category of goods and services that you sell. In other words, if you need to estimate TAM, it is essential to answer the following question: what type of customers can be interested (in need of) in your products and in what volume?

SAM (Serviceable Available Market)– is the “customer” part of the total addressable market (TAM) that can be actually reached; it means that this index shows the volume of customers who are ready to buy goods or services in the same category as yours. Think who and in what volume is ready to buy your products?

SOM (Serviceable and Obtainable Market) — is the part of SAM, which your company is eager and able to occupy, taking into account the strategic development of this market and competitors’ actions. Answer to the following question can help you to understand SOM: who exactly and in what volume will buy your products?

Available: represents an upper limit of market opportunity – what you could aspire to pursue long-term if you had the breadth and depth of offerings and market coverage.

Addressable: the potential of the market for you and your competitors. VCs care a lot about this as it represents the extent of the particular arena in which you compete.

Obtainable: represents what is realistically within your reach given factors such as sales coverage, product attributes, competitive entrenchment, and resource limitations.

• You must look outside. There is no way of estimating TAM, SAM or SOM without looking outside – at markets, competitors and market conditions. There are no shortcuts that lead to satisfactory conclusions.
• You must look inside, too. It is impossible to determine your SOM unless you make a thorough and honest appraisal of your capabilities.
• SOM = your business plan. Done properly (it is not difficult work, but it is hard work) the exercise effectively yields your business plan.

Understanding the techniques and principles of estimating market size is not difficult. Devoting the effort to do it thoroughly and effectively is the hard work. But the payoff is credibility and sustainability to the business plan.