The 4 Levels of Determining Market Opportunity
Defining your total market size is a vital factor to fully understanding your business and industry. Although many business owners want to market to everyone, there is always a select group of individuals that are the core group of customers. Businesses who know their target market and their total market size are able to segment their audiences, make more informed investment decisions, as well as increase their possibilities to convert customers into true ambassadors of their brand with repeat purchases while becoming unpaid spokespeople for your brand.
The Total Market Potential is the largest area out of all four levels. It is where you will need to begin to first define the overall populous before you can begin to scale down.
Total Market Potential
Definition: The total market size for a product at a specified period of time
Pro Tip: Segment your market first, then complete the math to determine the Total Market Potential
How to Calculate: Total Market Potential = Number of Buyers x Unit Price of Product/Service
Example: You are starting a lipstick brand for women. You are selling your lipstick for $20 a unit. You research and learn that there are 3.8 billion women in the world. Your Target Market Potential is 3.8 billion women x $20 = $76 billion.
The second level is the Total Available Market or TAM. This level factors in your revenue opportunity based on the number of customers within the target area you’ve pre-defined.
Total Available Market (TAM)
Definition: The total revenue opportunity available for your product or service or the total amount of demand for your product or service. Offers a holistic view of revenue opportunity
Pro Tip: Use this to help prioritize business opportunities based on its market potential. The TAM provides a much more realistic view of your market that then Total Market Potential
How to Calculate: Total Addressable Market = (Average Number of Opportunities x Average Selling Price of one unit of Product/Service) x Total Number of Customers for the Segment of the Targeted Market
Example: You want to sell your lipstick brand in retail locations that sale beauty products within the U.S. You calculate that there are 160 million women in the U.S. and you believe you can sale at least one product to 100% of them. You will still sale your lipstick for $20 per unit. Your Total Available Market is (160 million U.S. women x 100%) x $20 per unit = $3.2 billion.
The third level is the Serviceable Available Market or SAM. The SAM scales the TAM down even further by segmenting it into sub-markets or classes based on availability and propensity to purchase.
Serviceable Available Market (SAM)
Definition: The potential sales value of a specified market segment over a specified period of time that is limited to available demand for a particular product/service. The SAM segments the TAM into sub-markets by factoring in differences in quality or price as well as geographic, cultural, or regulatory considerations.
Pro Tip: Leverage market research to better estimate your available market opportunities
How to Calculate: Serviceable Available Market = (Average Number of Opportunities x Average Selling Price of one unit of Product/Service) x Potential Customers within Segmented Target Market
Example: You have now segmented your target market and through research have identified the 10 million college-aged women age 18 – 24 who live in metropolitan areas of the United States will be most beneficial for your business. You believe you can capture 50% of these college-aged women to purchase your product. You are still selling your lipstick for $20 a unit. Your Serviceable Available Market is (10 million women x 50%) x $20 per unit = $100 million.
The fourth and final level is the Serviceable Obtainable Market or SOM. The SOM is the market segment size you are able to acquire based on more realistic targeting efforts. There are various calculation options for the SOM. For example, if you already have a full year of business sales, you are able to take your market share from the previous year and multiply this years Serviceable Available Market (SAM). However, for new businesses without historical sales or even for existing businesses with low market share, they would need to factor in projections of market share or penetration. Below we’ve outlined a sound methodology to calculate SOM for all businesses, both new and existing.
Serviceable Obtainable Market (SOM)
Definition: The market size your business is realistically targeting. This factors in the competitive environment and the resources available to your business.
Pro Tip: If you are already in business, review historical sales performance records to help define a sales projections target. If you’re just getting started, identify sub-markets by geography or market factors where you believe you can generate sales quickly.
Calculation: Expected Penetration Rate x SOM (The Penetration Rate is calculated by the total market size divided by 100.)
Example: You want to focus your new lipstick brand on college-aged women, age 18-24, who live in metropolitan areas of the U.S. You believe New York City will be your top market. Through research, you find that there are 1 million women who fit these demographic factors. You also find that 80% of college-aged women wear make-up and lipstick specifically. You apply that percentage to your segmented market number (1 million women x 80% = 800,000 women). You believe you can capture 20% of these women. You are still selling your lipstick for $20 per unit. Your Serviceable Obtainable Market is (1 million women x 80%) x 20% penetration x $20 per unit = $3.2 million.
These four distinct levels are critical for business owners and managers to understand. The Total Market Potential is overall market size that encapsulates anyone with access to your product or service, regardless of whether they actually have or will purchase from you. The TAM (Total Available Market) is the first level where your target market is incorporated and allows you to scale down the Total Market Potential. The third level, the SAM, is the Serviceable Available Market and creates sub-categories of the TAM to segment even further to provide a perspective on market opportunities. The final level is the SOM, which help a company compare where they fit against their competitors and helps define a strategy to improve your positioning within your industry. Coupled together, each of these helps a company make better business and investment decisions as well as helps you understand your specific business more thoroughly.