Measuring the Market

April 18, 2023

Measuring the market

Understanding your market is increasingly important. We’ve conducted several deep dives for our customers and the results have enabled leaders to make better data driven decisions. 

One of the responsibilities of the executive team is to map and understand their target market, consumer behavior and make informed decisions. Insights can be gained into understanding a customers’ needs, preferences, and behaviors, which can then be used to create better products and services.

One aspect of this analysis is the quantification of the market. This involves calculating the size of the market and understanding the potential demand for a product or service. This information is important for making strategic decisions such as whether to enter a new market or expand an existing one.

TAM, SAM, and SOM are concepts used to quantify the market. TAM stands for Total Addressable Market, which represents the total demand for a product or service if it were to be sold to everyone in the market. 

SAM, or Serviceable Available Market, is the portion of the TAM representing the customers who might realistically be interested in buying what the company offers. To obtain the SAM, we must therefore make exclusions based on one or more criteria: ability to pay, age group, gender, level of education, occupation, geographic location, etc. We could also have exclusion criteria for companies, for example the sector of activity, number of employees, location of the head office, etc.

Finally, SOM, or Serviceable Obtainable Market, represents the portion of the SAM that the business can actually capture given its capabilities, ressources and the competition.

For the purposes of this article, let’s take a fictitious company as an example, ERP Experts inc.

ERP Experts is a Quebec based company that offers ERP implementation services. They provide ERP implementation services to businesses located in Quebec for service companies of all kinds (example : IT services, healthcare services, legal services, etc.).

TAM: In this example, we need to start from the total number of companies in Quebec (TAM), as shown in the first section of the image below:

SAM: Once we identify the TAM, we need to define : “What are the exclusion rules required to subtract companies that are not relevant for our product or services?”

In our example, we made these exclusions : 

  1. Businesses below 50 employees are excluded
  2. Businesses above 1000 employees are excluded
  3. Businesses that are not service companies

Once these exclusions are made, the next step is to convert the number of businesses into potential revenue. In our example, we made the assumption that the bigger the client, the more complex the mandate would be and therefore a higher price should be charged . As shown in the picture above, the price range per project is between 45 000$ to 306 000$, depending on the size of the client. 

If we add all the revenues related to each business size, we get a total value of 78.6M for this market! There is a problem with this number though… 

Considering 78.6M as a yearly market size would be wrong since not every business needs to change their ERP every year. To consider this factor, we divided by 5 the total value of the market to reflect the hypothesis that every business usually changes their ERP system once every 5 years. Once this adjustment is made, we then get a total yearly potential market of 15.7M$. 

The result of the analysis is clear, for the services offered and the current geography, there is a market of 15.7M per year. Since there are multiple service providers in this market, we can assume that a portion of the SAM can be obtained. 

What to do with this research 

Let’s say that ERP Experts is doing 5M$ in revenue right now for approximately 33% of the market and wants to double in the next 3 years. Due to their position in the market and the limited SAM (15.7M$), we would recommend that the company starts reflecting on new strategic possibilities, including:

  • Adapt the service offering in order to capture market shares in other verticals (e.g. other that service companies)
  • Launch a new service offer to upsell existing customers
  • Target a new geography (ex. Ontario)

Putting it all together

A trap to avoid is staying at a very high level when conducting this type of analysis. The level of detail matters greatly. 

Here are a few starting points to ask:

  • What is the total size of the market
  • What are the segments you are excluding from the market in order to calculate the SAM?
  • What part of the SAM could be realistically obtained? (SOM)
  • Based on your pricing, what is the remaining available share in dollars? 
  • What is a realistic goal based on your capabilities?

Building strong market research capabilities can lead to better decision making by management teams. TAM, SAM, and SOM are useful concepts for businesses to quantify the market and focus their efforts on the most profitable and achievable opportunities. Understanding these concepts can help the company target the right market segments and maximize its potential in the industry. 

If you are interested in learning more about market sizing and analysis offering, please reach out!