Originally Published Feb 24th, 2017 – Updated June 27th, 2017
This is a long article. Really long.
It’s long and full of information and exercises that I consider absolutely fundamental for any business owner to deeply understand.
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I’m going to use two words that will quickly turn you away.
Your first reaction will be to close this article and search for greener pastures.
But you mustn’t…
Because these two words are going to be the root of your success. If used correctly, these two words are going to help you:
- discover your niche,
- find your ideal customers,
- increase sales,
- grow your business, and
- crush your competition.
You’ve heard these words before. So has your competition.
Your competition has already used these two words to get funding, grow their startup, snag away your customers, and start encroaching on your company’s territory.
That’s because these words aren’t some hidden secret. They are widely used in corporate circles, necessary for business planning, and critical to any company’s success.
That’s why you’ll want to leave. Because you think you know what these words mean. Because you’re convinced that you’ve already gotten everything you can out of them. Because you believe you are too busy and have more pressing things to learn and bigger problems to solve.
But you don’t.
Because while you may have done this before, you haven’t used these two words since you started your business… and you haven’t used these two words to affect growth.
That’s what we’re going to do today.
We’re going to make your company stronger. Stronger from within (through a clear understanding of your customers, their buying power, and their problems) and from without (through increased presence, better customer targeting, and growth into new business areas).
Ready to hear them?
Two Words: Market Analysis
Still with me?
Good, because this isn’t an article on the standard, boring market analysis techniques like every other article out there.
This is a practical guide on how to use market analysis to find your customers, find your targets, and find your niche.
You see, for some, market analysis is witchcraft. It’s an artsy process for marketing-types who enjoy looking at customer value chains, distribution channels, and market segmentation. Some even view it as a homework assignment for an MBA student taking a class on entrepreneurship.
The truth is, that stuff bores me.
The other truth is, market analysis is much simpler (and more valuable) than that.
The goal? To help you understand who, where, and how many customers exist and what they are willing to pay for your product or service. It’s a comparison of the strengths and weaknesses of your company with the opportunities and threats in your buying environment.
Why the Best Companies Bother to Analyze their Market
That’s nice, you say, but why bother? You may have already done a market analysis, after all, either while crafting a business plan or looking for investors.
But once your business plan was finished, how many times have you honestly looked at it when you needed to grow? Honestly.
My guess is, never.
And that’s understandable. Most of the time, we use market analysis to show how much money we can make at the onset of our business, but forget how to use the results to grow our business in an intelligent and controlled way.
Market analysis has become this perform-and-forget kind of exercise.
So why bother? Because you can use market analysis to:
- figure out how to achieve your maximum company potential,
- gain insight into our competition,
- find immediate sales opportunities,
- set realistic goals around our achievable sales pipeline, and
- show you exactly what you need to do (and when) to grow your business.
The Right Time for Market Analysis
Market analysis is typically done in the business planning phase, but there is no better time to start than now if you haven’t already.
If you already have, but it’s been a while since you reviewed or updated it, it’s time to do it again.
Many investors require a market analysis to ensure the market size is attractive enough to invest. Many companies who aren’t looking for investors complete a market analysis as part of a business plan and to ensure they are on the right path.
Ideally, you would perform one with a good idea in mind, fleshed out, and ready for development. Before you invest in developing your product or service, the market analysis will let you know if your idea, once developed, is going to bear fruit.
If your idea needs tweaking, the analysis may reveal that as well. Better to know if your ideas need to change before spending time and money bringing your idea to market.
A Practical Exercise for Selling, Expanding, and Growing Your Market
I’ve found a full-on market analysis, especially for the small business owner, to be quite cumbersome. Many templates are long, arduous, and full of complex terms.
We’re not here to perform a detailed academic exercise. We’re here to help our customers solve their problems, make money, and grow.
I want to show you the three most practical numbers in a market analysis that will drive us to discover the essential parts of our business, our competition, and our customers. In the end, these three numbers will also help us understand how to sell immediately and expand later into a broader customer base.
You may have heard these three numbers before:
- Total Available Market
- Serviceable Addressable Market
- Serviceable Obtainable Market
Typically referred to as TAM, SAM, and SOM, let’s use these numbers to drive growth. But first, we’ll need to understand what they are.
Finding Your TAM, SAM, and SOM
Total Addressable Market, or TAM, is the total demand for your product. It’s the total number of customers who could use your product and the maximum amount of money they would be willing to spend.
TAM is a large number, bounded by no constraints other than your product or service type. It doesn’t care about competition, the size of your sales team, or limitations as a product or service provider.
To find your TAM, imagine the most perfect circumstances for your company. Imagine a world with unlimited distribution and no competition.
Why is this number important? Because, with this number in hand, you will have an idea of how much money is possible to make with your product or service. Unfortunately, you will have no plan to get there. That’s where SAM comes in…
Serviceable Available Market, or SAM, is the market you can realistically serve. It takes your competition into account. In fact, SAM can be calculated by figuring out the total market you and your competitors can realistically serve.
Your SAM is going to be limited by your business model and your geography. But when you find it, you will have a solid idea of the kind of revenue you can realistically achieve with your current business model for your products and services.
Unfortunately, this is still not a realistic expectation in the short term. Competition can be stiff, and you have further limitations that constrain your ability to make money. That’s where SOM comes in.
Serviceable Obtainable Market, or SOM, is the most realistic expectation of the current potential of your product or service. SOM is the potential you have with competition taking some of your sales, your sales team limited to closing a certain number of deals per day, and some conservative estimates around how many customers in your target market will actually find and buy your product.
TAM, SAM, SOM Example
If you are starting a new grocery store in town, your TAM will be the total number of people who shop at any grocery store multiplied by the average grocery bill of that shopper. It’s going to be a massive amount and not something you can realistically achieve.
If 100,000 people live in your city, and 50% of them are shopping age, and the average expected grocery bill is $100 every week, then your TAM is:
50,000 (shoppers) x $100 x 52 (weeks) or $260,000,000 for the year
If only you could achieve that! But you can’t…
So you look at your SAM. This is where your business model comes into play. If you are a grocery store that will only carry organic products, the number of people you can reach will be significantly reduced. Granted, the cost of your products may be more, but you’re not going to achieve $260,000,000 in sales. There is competition after all.
Let’s say, of those 50,000 people calculated in your TAM, about 5% of those shop for organic foods. Let’s also say that their average grocery bill will be $130 (your customers expect to pay a bit more for organic foods). Our SAM starts to look a bit more realistic and is calculated by:
50,000 (shoppers) x 5% x $130 x 52 (weeks) or $16,900,000
Now, if you are the only organic grocery store in town, then you have a monopoly. Congratulations! Your SOM is the same as your SAM.
Most of the time, however, your competition will take market share from you. Additionally, because of the size of your store, you may only be able to support 1000 customers a week instead of the 2500 estimated in your SAM calculation. With all of this information, we’re able to create some reasonably educated calculations on your realistic revenue targets for the year.
If your competition takes those additional 1500 customers you can’t support in any given week, your SOM looks like:
1000 x $130 x 52 weeks or $6,760,000
Not too shabby, but only you can figure out if this is enough to repay expenses and profit.
Using Market Analysis to Grow Your Business
Here’s the meat of it all.
Calculating your TAM, SAM, and SOM just forced you to estimate your total market size, research your customers’ revenue and product offerings, and think through the ages, buying power, and types of buyers.
Now let’s use that to grow your business.
First, Find Your Niche
Why compete when you can find your niche and attract customers that no competitor can grab? When you find your niche, you can charge the value of your product instead of fighting with your competition on price.
Through a TAM, SAM, and SOM calculation, you should have a firm understanding of who your customers are, what problems keep them up at night, and how much they are willing to pay for solutions to those problems.
You should also have a solid understanding of what your competition is up to and how your products and services are different.
The combination of these two (your customers’ problems, and the way your products and services stand out) are your niche. These will focus and drive your development efforts and help you craft a message that resonates with your customers, all but forcing them to buy what you’re offering.
Spend the time to understand what you are good at, what you can offer your customers, and match that with what customers need. When you know how to use your unique expertise to solve your customers’ problems in a way your competition can’t, you’ll have found your niche and will be able to take the next steps toward increasing sales.
Need a little inspiration? Read the classic business book, Blue Ocean Strategy. It’s a primer on standing out against your competition.
Increasing Current Sales
Recall your SOM for this exercise. Your SOM showed limitations such as competition, the size of your sales force, distribution constraints, etc. These are the barriers you need to list, because you’re going to look at each one in turn and brainstorm ways to remove them.
Focus on one limitation at a time, thoroughly removing or reducing it and tracking your sales accordingly. If your manufacturing speed is only allowing you to produce 10 widgets a day, put a plan in place to increase that manufacturing speed and see if sales grow accordingly. If your sales team is only able to close 2 deals a month, add a salesperson or sales reps to increase your pipeline and see if sales increase accordingly.
Years ago my company split into two separate companies going after two distinct markets. In the months following this split, we grew more frustrated that the other side seemed to be having all the success. Granted, we were in two separate markets, but the comparison between them and us was inevitable.
We discovered later that, while our sales team had dwindled to 2 people, they had invested in 26! Interestingly enough, the amount of revenue they were achieving was approximately 13 times our own… the correlation was too hard to ignore, and I’ve forever wondered if adding 26 salespeople of our own would have kept us on pace with them.
Only an analysis like this, done up front, could have predicted the outcome and set us on the correct path.
Using the grocery store example above, we can see that a major limitation of our sales is how many people we can serve in any given week. If we can capture closer to 100% of the organic food shoppers in the area by expanding our store or building a new store elsewhere, perhaps we can increase our sales and make for a good return on investment.
Grow Your Business
So you’ve done all you can to find your niche, minimize your limitations and increase sales using your SOM, and are ready to grow? This is where your SAM and TAM come in…
Remember your SAM is the total market you and your competition are going after. Remember too your TAM is the unconstrained view of your potential buyers—the ideal selling situation for you.
Looking at your SAM and TAM in the right way will help you understand how you can encroach on your competition and expand your reach towards that ideal. It can also push into new markets with slight changes to existing offerings.
In the grocery store example above, your SAM showed you were limited by the type of food you sold; organic food. Want to knock some wind out of your competitors’ sales (pun intended)? Start selling non-organic foods.
Additionally, your TAM was limited by the geographic location of the grocery store, and, therefore, the number of customers that could potentially shop at your store. Maybe growing your business is as simple as adding a new store out of town. Maybe adding a pharmacy to your store grows your business even more.
Of course, there are countless examples of how grocery stores added locations, or how grocery stores added pharmacies and pharmacies added groceries to increase sales, and now it’s easy to see why. They were trying to grow their business.
The key is staying in your niche. If you can continue to use your expertise while growing your business and crushing your competition, you’re well on the path to success.
So… Put It into Practice!
Here are some thoughts to help you to know whether doing this type of market sizing and analysis is worthwhile:
- If you don’t know how to increase your current sales among your current customers, do this analysis.
- When you have enough traction with your current customers and are looking to expand, do this analysis.
- After you achieve dominance in your current market and are looking for a way to grow your overall business, do this analysis.
These numbers, your TAM, SAM, and SOM aren’t static. They won’t be helpful if you run them once while writing a business plan or attempting to get investors.
They are to be used again and again to understand how to get from where you are to where you want to be!
Use this market analysis and TAM, SAM, and SOM calculations to drive new product features, new service offerings, make new hires, and buy capital equipment.
It’s the most guided way I know to grow a business in a thoughtful, calculated way that compliments your expertise and preserves your niche.
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About the Author
CO-FOUNDER | TECHNOLOGY, PRODUCT DEVELOPMENT, MARKETING, AND SALES
Michael Mehlberg helps small businesses owners achieve their goals and live their passion. His approach to technology, corporate strategy, product development, marketing, and sales is both practical and highly effective, and has helped multiple small businesses grow into the company their owners envisioned. Reach out by emailing him at email@example.com or learn more on our About page.