In today's rapidly evolving technological landscape, B2B tech companies must efficiently determine their market size to ensure strategic decisions are backed by data. This article breaks down the methods and processes for doing just that, including market segmentation, analysis techniques, and real-world examples to bring your B2B tech market sizing to fruition.
Understanding Market Sizing
Market sizing is the process of determining the potential of a specific market within a B2B context, often used to assess potential sales revenue. It involves evaluating three dimensions: Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM).
Starting with Total Addressable Market (TAM)
Total Addressable Market (TAM) represents the total revenue opportunity if a product or service captures 100% market share. To calculate TAM, identify all buyers within your market and estimate their spending potential.
For B2B tech companies, TAM can be determined by analyzing industry reports, using census data, and leveraging databases like Gartner or IDC. For example, if you're offering cloud services, calculate the overall size of businesses that require cloud solutions globally.
Narrowing Down to Serviceable Available Market (SAM)
After establishing the TAM, the next step is to determine the Serviceable Available Market (SAM). This represents the portion of the TAM segmented by your specific product offerings and geographical reach.
For instance, if a B2B tech company solely focuses on North American SMEs needing AI solutions, your SAM should only consider AI tech needs of North American SMEs rather than the entire global AI market. Adjust your TAM figures by narrowing it to regions and customer segments your company can realistically serve.
Identifying Serviceable Obtainable Market (SOM)
The Serviceable Obtainable Market (SOM) narrows further to understand the specific share of the market your company can successfully capture in the short-to-medium term.
This analysis can involve competitive analysis, understanding market constraints, and evaluating your company's capacity, differentiators, and execution capabilities. If a tech startup introduces a new CRM software, calculate the anticipated market share based on current service offerings, existing customer base, and the competitive landscape.
Bottom-Up versus Top-Down Approach
Market sizing can be conducted using both the bottom-up and top-down approaches. Each has unique merits and should be chosen based on your resources and data availability.
A bottom-up approach involves starting with smaller data points, such as the number of units you can sell or customers you intend to target, and building those numbers up to the entire market level. A top-down approach uses macro-level data and breaks it down into smaller segments. For example, using a bottom-up approach, a SaaS company might multiply its current sales by the projected growth rate across its target industries.
Utilizing Secondary Data Sources
Utilizing third-party data sources can be invaluable. Industry reports, market research firms, and government databases provide credible insights that can help validate assumptions and projections.
For example, IDC and Forrester offer valuable data on industry trends that B2B tech companies can leverage for benchmarking and forecasting.
Leveraging Surveys and Interviews
Directly engaging with potential customers through surveys, interviews, or focus groups can provide real-world insights into market needs and customer expectations.
This qualitative data collection can be indispensable in understanding customer pain points and fine-tuning the estimate of your SOM.
Case Study: Market Sizing for a New AI-driven CRM Tool
As an example, suppose a startup is developing an AI-driven CRM tool specifically for retail businesses. Here's how they might approach market sizing:
Determine TAM by understanding the global demand for CRMs and quantifying the total market revenue in this domain.
Refine to SAM by narrowing the focus to retail businesses in the USA, determining how many of these businesses are in need of CRM upgrades using industry reports.
Establish SOM by estimating the market share your AI-driven feature can capture based on unique selling propositions (USPs), potential partnerships, and competitor analysis.
Final words
Accurate market sizing is crucial for B2B tech companies seeking to maximize their opportunities and minimize risks. By understanding TAM, SAM, and SOM, leveraging reliable data sources, and applying both bottom-up and top-down approaches, firms can better strategize their efforts. Whether launching a new product or planning to enter a new market, these tools provide an informed pathway to success, enabling sustainable growth in the competitive B2B tech landscape.
