Market Definition and Sizing

November 16, 2017 / Steve Johnson

Get your facts first, and then you can distort them as much as you please. Mark Twain, American author and humorist

Sizing a market opportunity has always been problematic. To calculate expected revenues, you need to know how many buyers you’re likely to get and how much you’re able to charge them. 

The real challenge is precision. Organizational leaders frequently want specifics long before they are known or knowable. How much will this cost? How many can we sell? There’s a lot of estimation (ie., “guessing”) in any forecasting.

The most common academic tool for market sizing is TAM/SAM/SOM. The Total Addressable Market (TAM) is the number of all buyers; Serviceable Available Market (SAM) is the portion of TAM that you can reach with your sales channels; and SOM is your likely share of the market by your sales channels. [Link for more]

All in all, this is a pretty good approach.

Let’s start with some definitions. A market is a known set of buyers, typically a set of people or businesses. Some markets are geographic, like Brazil or China; others are industrial, like education or banking. Generally, we define market segments as a combination of both: an industry within a geography—banking in China or education in Brazil.

A market opportunity defines a group of buyers who share a set of problems who can be reached through your marketing and sales efforts.

Define your buyer personas and then identify how many people fit that profile. A persona will have aspects of geographic market and industrial market as well as a role. The number we’re looking for is how many in the market can be reached by your marketing and sales efforts.

Example: product managers. LinkedIn reports 2,481,164 results for the title product manager plus 191,000 for product owner. For a software business focused on product management, there are plenty of candidates to target.

Example: teachers in America. The number of public school teachers is 3.1 million, plus 400,000 private school teachers, according to National Center for Education Statistics.

Now comes the hard part. What percentage will likely buy (from anyone) and what percentage will buy from you?

How many have the problem? (or how many will buy?)

Onsite interviews, observation, and other market sensing techniques reveal individual instances of market problems. That is, you found a few people or companies with problems. Now you’ll need to apply some quantitative measures. Survey a few hundred to determine what percentage have the problem or set up a web page listing key problems and ask which apply to each respondent.

There are 3.5 million teachers in America. How many have the problem you solve? Survey a few hundred teachers to find out. If 20 out of 100 report the problem, you’ve got a reasonable expectation that 20% of all personas have the problem.

How many will buy from you?

To determine your likely sales, one other number come in handy. What is your current market share? Of recent purchases, how many do you win and how many do you lose? Because that’s the percentage you’re likely to win in the future—unless you change something about your product, price, promotion or sales methods.

To recap:

1. Identify the persona and problem with interviews and observation
2. Total market (TAM): Size the market by learning the population that fit the persona profile
3. Potential buyers (SAM): Survey a few hundred who fit the persona profile and use that percentage to determine potential buyers.
4. Your likely buyers (SOM): multiply potential buyers by your historical win rate

There you have it. A logical estimate supported by market sensing. A reasonable set of assumptions that lead to market sizing for a product opportunity. And remember to revise these estimates as you learn more about the market and your sales success with the personas.