What Market Sizing Really Delivers in Business Value
“New business applications jumped 24 percent in 2020, the biggest surge in history, and they remain at a much higher level then precrisis.” – Washington Post, 24June2021
Launching – or rethinking – a business, especially tech-related in any way? You need to adequately size your market(s) in order to have any chance at success. This is one in a series of posts distilled from our addressable market sizing workshops, to help business leaders and investors understand what’s involved in effective market sizing, and how they should expect to benefit from it. Beyond just seeing sales numbers, that is.
Market sizing doesn’t just tell us how much we can sell. It tells us what to make, how much to make, what to invest, who to hire, how to get to market, why customers buy, how to price, what our support needs will be, and more. So, failure to adequately size a market doesn’t just lead to disappointing sales numbers – it enables failure across all aspects of business.
Understanding and applying key market-sizing concepts and models will enable any business to develop the insight needed to succeed. The cornerstone concepts that you need to understand – and be able to apply – are Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). To help Finance, Sales, and Marketing leaders – and investors – understand market opportunity and achieve realistic results, we regularly conduct workshops on TAM, SAM, and SOM for software vendors and IT services providers.
What should you get out of any effective market-sizing exercise?
When a market-sizing exercise is conducted adequately and effectively, a company should be able to discern the following information and insights:
- Realistic market opportunity for an offering
- Improved Sales and Marketing targeting
- Competitiveness (including client and partner retention)
- Untapped customer segments
- Resource needs
- Revenue by market, buyer type, and channel
- Costs of going to – and staying in – markets
Because all of this information shapes business mission, goals, responsibilities, functions, spending, and operation, it should be made available to as many constituents within the business as is practical. The more that product developers, budget planners, sales teams, support staff, and others understand – in the context of their roles – the more they will understand the value that they can develop and deliver. That enables and helps to sustain substantial employee buy-in and engagement – things that have become more challenging than ever in the wake of COVID workplace and workflow disruption.
What should investors get from market sizing?
Effective market sizing also benefits investors in the business, by helping to shape realistic understanding of the following:
- Upside potential based on supportable facts and methodology
- Relative scope of investment required
- Practicality of return on investment
- Relative risk of investment, based on:
- Competitive environment
- Management vision
- Business plan viability
- Profitability likelihood
When we say “investors,” we don’t mean only those investing in startups. Publicly-traded and privately-held software and services providers benefit from sharing accurate market sizing forecasts with shareholders as well.
Sizing is an Ongoing, Repeatable Need
When you introduce anything successful into a market, that market changes. It usually changes in ways not expected or accounted for. And it never changes at the pace or scope expected. Pace and scope of market change are so unpredictable in most tech markets that they frequently are estimated very conservatively, and agreed to, before attempting TAM and similar exercises.
Change is why market sizing, including TAM, SAM, and SOM, must be regularly reviewed and updated. Any significant change in almost any aspect of any business or market – e.g., the scope and pace of acceptance, adoption, and adaptation of offerings; M&A, regulation, competition, capital availability, labor availability, supply disruption – should drive re-evaluation of TAM, SAM, and SOM.
The business value of market sizing goes well beyond estimating potential and likely sales opportunities. TAM-SAM-SOM based market sizing enables – and when properly done, forces – understanding of what the business needs to succeed. Realistic projection and planning for Finance, HR, Sales, Marketing, and operational management cannot succeed without effective sizing exercises.
Next in this series: critical insights into what, exactly, TAM is, what it tells us, and how to use it.
Interested in better understanding your markets? Would your firm benefit from market insights tailored to your business requirements? The Analyst Syndicate includes more than 25 independent tech market analysts with more than 500 combined years of experience. We quickly and cost-effectively provide objective, data-driven, experience-built insights and recommendations regarding:
- Sizing estimates for new or existing technology and services markets
- Go-to-market plans and positioning
- Customer support needs and expectations
- Channel partner characteristics and requirements
Find out more: firstname.lastname@example.org