Market Sizing - How to Estimate Market Size and Choose the Right Strategies

Market Sizing is a crucial step for any startup or business looking to launch a new product or service.

In this article, we explore the fundamentals of Market Sizing, calculation methods, and competitive positioning strategies based on the practices and key concepts in the "Market Sizing 2024" report.

Why is Market Sizing Important?

Market Sizing allows companies to estimate the total sales value of a specific product or service over a defined period.

This analysis is essential for understanding if the market is large enough to sustain the business, identifying the real need for the product, and assessing growth potential.

Key questions that a market analysis seeks to answer include:

• How large is the market?
• Which market segments need our solution?
• What is the growth potential of our solution in terms of revenue?

Market Sizing is crucial not only for startups and investors but also for established companies seeking to evaluate the attractiveness of new investment opportunities.

Core Concepts: TAM, SAM, and SOM

Three core concepts emerge when discussing Market Sizing:

1. TAM (Total Addressable Market): Represents the total market value assuming unlimited resources and 100% market share. It serves as a measure of the entire universe of consumers for a specific solution.
2. SAM (Serviceable Available Market): Identifies the reachable market value with current products and services, including only those customers who can actually be served.
3. SOM (Serviceable Obtainable Market): Estimates the portion of the SAM that a company can realistically reach within the next 3-5 years, considering competition, budget, and execution capacity.

These indicators help accurately segment and calculate market sizes, providing a solid foundation for entry and growth strategies.

Market Size Calculation Approaches

There are two primary methods for calculating market size: Top-Down and Bottom-Up.

Top-Down Method

This method starts with a global market estimate (TAM), which is then progressively refined through demographic and geographic filters to obtain SAM and SOM.

It is an effective strategy for gaining an overview, especially when aggregated market data is available. Key steps include:

1. Defining TAM through research and market data.
2. Applying demographic and geographic segmentation to derive SAM.
3. Calculating SOM by considering the realistic market share for the coming years.

Bottom-Up Method

The Bottom-Up method begins with local estimates (such as potential sales in a specific region or channel) and scales them to gain a complete view. This method is ideal for companies with access to specific customer and sales channel data. Main steps include:

1. Developing a local sales plan.
2. Identifying sales channels and marketing expenses.
3. Expanding local estimates to obtain SAM and TAM.

Market Life Cycle: When to Enter and When to Exit

Each market follows a life cycle that includes Introduction, Growth, Maturity, Saturation, and eventually Decline.

Understanding which stage a market is in enables companies to decide on appropriate strategies for entry or optimizing operations:

• Introduction and Growth: Companies should focus on innovation and market penetration. In these stages, pioneers and early adopters are essential.
• Maturity and Saturation: It is time to optimize customer retention and increase market share.
• Decline: Companies may evaluate repositioning or exiting the market if conditions are no longer favorable.

Positioning Strategies and Competitive Analysis

To build a competitive advantage, it is essential to assess competitors and define Points of Parity and Points of Distinction (POP and POD). These concepts refer to:

• Points of Parity (POP): Aspects where at least matching the competition is necessary to remain competitive.
• Points of Distinction (POD): Unique features that differentiate the product and create added value.

The SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis allows startups to assess their strengths and weaknesses as well as opportunities and threats in the market.

In some cases, it may be useful to extend the analysis to a SWOTAR, which adds Aspiration (what the company aims to become) and Results (expected outcomes).

Common Market Sizing Mistakes

When estimating market size, it is easy to make mistakes that can compromise strategy effectiveness. Among the most common:

1. Incomplete or approximate data: Obtaining data specific to sector and geography is essential.
2. Assuming uniform demand: Segmenting the market by age, geography, and other parameters can improve estimate accuracy.
3. Ignoring regulatory context: Recessions, regulatory changes, and specific laws can significantly affect market size.

Luxury Market Trends: A Market Sizing Example

In 2024, the luxury market provides an interesting example of market sizing, with changing consumer preferences.

Millennials and Gen Z are gaining an increasingly larger market share, representing 50% of luxury consumers by 2025.

Key trends include:

• Digitalization: Increasingly personalized digital experiences.
• Authenticity and Sustainability Values: Consumers seek ethical, exclusive, and authentic brands.

Conclusions

Market Sizing is a powerful tool to guide business strategies and attract investors. Understanding market size, competition, and consumer preferences allows for effective planning for sustainable growth.

Whether using a Top-Down or Bottom-Up approach, effective segmentation and a clear view of opportunities and threats are essential for success.

In an ever-evolving world, the ability to adapt estimates and strategies becomes a competitive advantage in itself.