Market size estimation reflects your vision and helps you build a strategic action plan. No investor would want to invest in a company that has no understanding of the market size they are serving or will serve. In fact, if a company's potential market is too small, it will limit your ability to attract investment.
TAM, SAM, SOM: Tools to Visualize the Overall Business Story
Total Available Market (TAM): This represents the total demand for your product or service. Depending on your vision, whether you want to target the global or regional market, your TAM will vary. For example, if you are running a travel tour business within Vietnam for Vietnamese customers, your TAM would be the total demand for travel services for Vietnamese people within Vietnam.
Serviceable Available Market (SAM): When you start a business with limited resources, you may only be able to serve a specific region in the next 2-3 years. SAM helps you limit the market scope more realistically based on what you can serve.
Serviceable Obtainable Market (SOM): If you are the only player in the market, SOM could be the same as SAM. But in competitive markets, SOM needs to be calculated carefully based on the percentage you can realistically capture. SOM reflects your current capability and market dominance potential, SAM reflects real market competition, and TAM reflects your product or service's future potential.
Estimating from Your Expectations
Another way to estimate market size is to start from your understanding using average statistics. The formula for estimating market size is:
Market Size = A x B x C
Where:
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A = Number of customers
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B = Average transaction size
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C = Number of transactions per customer per year
For example, if you're targeting the children’s consumer goods market in Hanoi:
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The number of children born in Hanoi annually is 120,000.
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The average spending on children’s goods is 350,000 VND.
Market size in Hanoi = 120,000 x 350,000 x 12 = 504 billion VND.
If you expect your monthly revenue to reach 1.2 billion VND, your projected market share would be:
1.2 x 12 / 504,000,000,000 = 3% market share.
Using Statistics and Reports
This is especially important when entering niche markets where conducting expensive market research may not be feasible. For example, if you want to develop a health and entertainment service for the elderly in large cities, you would need statistics on the elderly population from statistical agencies to visualize your TAM. Then, based on your observation of the income of different groups of retirees, you can estimate their ability to pay for your product or service and narrow down the market scope. Finally, check how many households in your area have elderly individuals who can afford such products. While these statistics may not always be up to date, they help give a basic understanding of how accessible your market might be.
Nguyễn Đặng Tuấn Minh
Managing Director & Co-founder of KisStartup
Source: Tia Sáng
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