TAM SAM SOM Market Evaluations

 

TAM SAM SOM is mostly misunderstood. But actually when you look at simple examples, it is quite easy to understand. If you have any questions, just let me know, because I deal with TAM SAM SOM evaluations every day!

Before you enter the market with your product, you have to keep 3 important questions in mind.

What is the TAM SAM SOM for my product?

Here the official definition:

Tam: Total Available Market

Focus on: Total market / size

Example: Total LED Market

Sam: Served/Serviceable Available Market

Focus on: Your own technology/ services

Example: The Total Living colors LED market  (Segment of total LED market)

Som: Serviceable Obtainable Market

Focus on: Which realistic market share can be obtained by myself considering:

competition, trends, expected demand/forecast, countries, my sales/distribution channels and other market influences?) 

Example: My realistic goal to sell Living Color Products into the LED market.

The situation:
Let's say I am company XYZ who makes LED lighting bulbs for home use.
But I only have the technology to produce the non-dimmable version of LED lighting bulbs. 

The TAM
would be the whole worldwide LED lighting market.
(Focus on total LED market)

My SAM
would be the worldwide non-dimmable LED bulbs market.
(Focus on your own technology/ what you can serve within the total LED market)

My SOM
would be the realistic and obtainable market considering:
Competition, trends, demand/ forecast, focus countries and sales channels
(distributors, resellers, direct business etc.) that I can achieve to sell in 2014.
(Focus on your realistic market share that you can obtain considering all market factors within the non-dimmable LED market)

Remark:
The TAM stands for Total Available Market.
Depending on how you look at the LED market - in the above example my TAM can be:
1) The total worldwide LED lighting market (including all LED bulbs, LED streetlights, etc.)
2) The total worldwide LED lighting bulb market (including the dimmable and non-dimmable LED versions). For the TAM you are free to choose one or the other. However, more important is the question on your SAM and SOM. The SAM is always focusing on your own technology, that, what you can serve on the market. SOM reflects the SAM and also considers all market factors that can possibly influence the success of your product. 
_____________________________________________________________________________

Here a deeper explanation to TAM SAM SOM
in terms of OEM/ODM business model:

Example:
I am company XYZ, OEM Manufacturer and supplier entering the LED Living Colors Market:

TAM: From my market research and reports which I have read, I found out that the total number of LED Living Colour Lamps being sold in 2014 in Europe will be approximately 1 Million pieces. 
Total Available Market
The TAM Question: What is the Total Achievable Sales Amount of LED Living Colour lamps incorporating all market players together?

SAM: Philips has the highest market share of the LED Living Colour lamps with 800.000 units a year. The remaining 200.000 units are being sold by other brands.
My SAM (Servable Available Market) is 80% of the total market of 1 Million LED Living Colours lamps. The SAM Question: What can I achieve in 2014 in maximum sales?

SOM: My strategy as OEM manufacturer is to focus and work together with the Top Market Player, in this case Philips only. As I am a new supplier to Philips, they agree to test me out and ask me to produce only 200.000 pieces of the 800.000 that they expect to sell in 2014.
The remaining 600.000 units are being produced by their current suppliers.

In this case my SOM (Serviceable and Optainable Market) will be 200.000 pieces (a share of 25%) of the 800.000 pieces from Philips. This SOM is my realistic and reachable target for 2014.
The SOM Question: What can I (as company XYZ) achieve in 2014 selling to Philips?

https://tamsamsom.blogspot.com/

Finite Capacity Scheduling

 

What are the benefits and challenges of using finite capacity scheduling (FCS)?

Finite capacity scheduling (FCS) is a method of planning and managing production processes that takes into account the actual capacity and availability of resources, such as machines, labor, materials, and time. FCS aims to optimize the utilization of resources, reduce lead times and inventory, and increase customer satisfaction. However, FCS also poses some challenges, such as complexity, uncertainty, and flexibility. In this article, you will learn about the benefits and challenges of using FCS in different types of production environments.

FCS vs. infinite capacity scheduling (ICS)

The main difference between FCS and ICS is that FCS considers the realistic constraints and limitations of the production system, while ICS assumes that there is unlimited capacity and resources to meet the demand. ICS is simpler and easier to implement, but it often leads to overloading, bottlenecks, delays, and waste. FCS is more realistic and accurate, but it requires more data, analysis, and coordination. FCS can also adapt to changes in demand, capacity, or priorities more effectively than ICS

Benefits of FCS

FCS offers several advantages for production managers and customers, such as improved resource utilization, reduced lead times and inventory, increased customer satisfaction, and enhanced visibility and control. FCS helps to allocate resources more efficiently and avoid idle time, overwork, or underutilization. It also helps to schedule production activities more accurately and minimize the waiting time between operations, which reduces the need for excess inventory and storage space. Moreover, FCS helps to meet customer expectations and deadlines more reliably and consistently, which enhances the quality and reputation of the products and services. Additionally, it helps to monitor and track the status and performance of the production processes and resources, which enables better decision making and problem solving

Challenges of FCS

FCS involves certain challenges and difficulties, such as the complexity and data requirements which necessitate a lot of information and calculations to determine the optimal production schedule. This process must integrate data from various sources and systems, such as sales, engineering, purchasing, and inventory. Additionally, FCS must take into account the uncertainty and variability of the production environment, such as demand fluctuations, capacity changes, quality issues, breakdowns, or disruptions. This requires adjusting and rescheduling the production plan accordingly. Finally, FCS must balance efficiency and flexibility with short-term and long-term goals while accommodating customer requests, special orders, or urgent orders without compromising the overall production schedule or performance

Types of FCS

When it comes to FCS methods and tools, the nature and characteristics of the production system determine the type used. Forward scheduling is best for make-to-stock or repetitive production processes with stable demand and capacity, while backward scheduling is better for make-to-order or customized production processes with variable demand and capacity. Mixed scheduling is ideal for hybrid or flexible production processes with diverse demand and capacity, and constraint-based scheduling works best for complex or interdependent production processes with multiple constraints or limitations.

Best practices for FCS

To implement FCS successfully and effectively, production managers should adhere to some best practices. This includes defining the objectives and parameters of the production schedule, such as demand forecast and capacity availability, as well as collecting and verifying data and information needed for FCS. It is also important to choose and apply the appropriate FCS method and tool for the production system. Furthermore, managers should monitor and evaluate the results of FCS, such as resource utilization, inventory levels, customer satisfaction, and profitability. Lastly, it is essential to review and update the production schedule regularly based on changes from the production environment.

Finite capacity scheduling is so-called because it takes capacity into account from the very outset. The schedule is based on the capacity available. Infinite capacity scheduling - the approach used in MRP II - schedules using the customers' order due date and then tries to reconcile the result with the capacity available. There is no single accepted way to carry out Finite Capacity Scheduling, and of the various approaches that exist, some are proprietary secrets.

It is however possible to define certain approaches, or types of scheduler:

 

Electronic scheduling board

The simplest scheduler is the electronic scheduling board, which mimics the old fashioned card-based loading boards, but the system calculates times automatically and will warn of any attempt to load two jobs on the same machine. There is no scheduling algorithm as such involved.

Order Based Scheduling

In Order Based Scheduling the tasks are scheduled on the basis of order priority. The sequence at individual resources is determined by the overall priority of the order for which the parts are destined. It is a distinct improvement on infinite capacity schedulers but its biggest drawback is that it allows gaps to appear on resources. Some schedulers allow the process to be iterated to try and reduce gaps and therefore reduce the time through the system. This iteration can be very time consuming.

Constraint based schedulers, Synchronised Manufacturing

With the Constraint based schedulers, also known as Synchronised Manufacturing, the idea is to locate the bottleneck in the line and ensure that it is always loaded. The assumption is that non-bottlenecks can take everything thrown at them, and this allows them to be synchronised to the bottleneck through the Master Production Schedule (MPS). The MPS is generated by loading the orders onto the bottleneck and thus determining when they will be ready. This system is inclined to produce gaps and is also very sensitive to small changes such as a customer wanting to reschedule an order.

Discrete Event Simulation

In Discrete Event Simulation the simulation loads all resources at a point of time. When all contentions and queues are resolved it moves on to the next set of events. Because the simulation moves from one set of events to the next, there are far fewer gaps in schedules produced this way and they are far more stable. The problems with simulations are that they are: laborious ;and also difficult to incorporate into other systems such as data feedback from the shop floor.

Algorithms, Genetic algorithms

Algorithms usually suffer from being highly mathematical and therefore user unfriendly, however more recently a new approach has emerged under the general title of `genetic algorithms'. These use a 'fitness' criterion. A typical example would be to minimise the total time for jobs to stay in production. The procedure starts with a schedule or family of schedules. The idea is to try and improve them using a selection mechanism akin to natural selection. 'Children' (new schedules) are bred using characteristics (such as sequences of work) from parent schedules. If the new child shows improved fitness i.e. is faster than the parents, it replaces the worst schedule. While the approach looks promising it is still in the early stages.

There remains the question of how these new approaches fit with existing schedulers, particularly MRP in which companies have invested vast sums. In the first three cases they tend to replace the scheduling heart of the MRP system while leaving the rest unchanged. To that extent the MRP system acts like a database manager.

 

References

• Harrison. M., "MRP II & Finite Capacity Scheduling - a combination for the 90's", Works Management, December 1991.
• Kirchmier. W., "Finite capacity Scheduling", Proceedings of the 37th International Conference APICS, Falls Road, VA, 1994

https://www.ifm.eng.cam.ac.uk/

Finite-Capacity Scheduling and Planning 

Priority‘s production planning facility includes a unique feature that performs forward scheduling followed by backwards scheduling (most other systems schedule backwards and then forwards). Forward scheduling not only ensures that no work is planned before materials are available, but also pinpoints the earliest possible completion date of any given order item.

Backwards scheduling enables production to follow the rules of JIT (just-in-time planning). That is, if it is clear that a component for a given assembly will not be available on time, the production (or purchase) of the remaining components of that assembly is likewise postponed to the latest possible start date (where the user can regulate the delay).

Preparation for Production Planning 

• Production planning and scheduling are carried out on the basis of:
• Open sales orders (grouped by user-designated priorities)
• The bill of materials of the ordered item, taking into account parent-child ratios and the routings of all parts in the BOM
• Available inventory, actual and planned
• Material constraints
• Tooling constraints
• Capacity constraints
• Labor constraints
• A wealth of parameters that determine the standard time a job will take, percentages of scrap, lot sizes and the like.

Before production planning is run, the planning data used by the program are updated and frozen. This prepares for a new planning cycle which wipes clean the results of the previous cycle and takes into account updated data (such as current balances, due dates of open purchase orders and the like).

Production Planning
Priority allows you to choose between three planning options (see below):

• Forward scheduling only
• Forward and backward scheduling
• Forward and backward JIT scheduling.

Once the option has been selected, planning is carried out separately for each group of orders, according to Priority. Planning for a given order group takes into account data from the previous planning session.

Forward Scheduling 

This option is recommended during initial planning simulations, as it provides a precise picture of planning results without any further manipulations. It therefore makes it easier to pinpoint the factors that might be leading to poor planning results (e.g., delayed materials).

Forward+Backward Scheduling 

This option offers forward scheduling followed by backward scheduling. The latter reduces slack between child and parent jobs wherever possible.

Forward+Bkward JIT Scheduling 

This option provides for just-in-time planning. Forward scheduling is followed by backward scheduling (slack reduction), and the planning of all order items is postponed to the latest possible start date. This option allows for a supply of goods to customers as close to the due date as possible.

Stages in Production Planning 

The following actions are performed by the production planning mechanism:

1. Determination of calendric capacity — construction or extension of each work cell’s calendar, including, if necessary, a calendar for each machine in the work cell.
2. Determination of lot size, taking into account process batch quantity, work order size, campaign size and minimum production size (as defined per part, per job or as a factory-wide constant).
3. Calculation of required quantities for production — This is achieved by “expanding” the BOM of each of the ordered parts in the current planning group, down to the level of raw materials, and then subtracting floor inventory not already destined for another job (whether existing at the time of planning or deriving from earlier production planning sessions). In addition, available and anticipated warehouse inventory is taken into account (based on purchase orders and compressed lead times).
4. Order splitting to distribute required quantities into lots, taking into consideration lot size, work order size, campaign size, and rounded quantities of excess inventory.
5. Calculation of set-up and processing times, estimating the time required, per work cell, to set up and process planned jobs (concurrent or sequential).
6. Workload balancing, utilizing, whenever available, processing alternatives to reduce the workload on the main work cell and main operation. For every job whose operation, work cell, part or tools has alternates, an attempt is made to distribute the workload as evenly as possible.
7. Job sequencing per work cell,with the aim of minimizing set-up times and smoothing production in those work cells that have a tendency to become bottlenecks. The fuller a given work cell’s calendar and the greater its workload, the higher its priority in terms of job sequencing and the higher the priority of its child jobs. The system attempts to begin production at the bottleneck work cell (and on its child jobs) as early as possible in order to take advantage of any idle time at the work cell before it comes under pressure of constant operation. You have the option of sequencing with the aim of optimizing adherence to due dates or optimizing usage of work-cell capacity.
8. Preparation of the issues plan.

Planning Simulations and their Implementation 

Before work orders and the issues plan are actually created, Priority generates a planning simulation for testing what-if scenarios based on the planning data.

Once production planning has been run, results may be viewed in various reports. A decision is then made as to whether to put the plan into action or to make certain modifications — reorganize order groups (add or delete order items, rearrange groups, re-prioritize them) or add a work shift — and then rerun the planning program.

Analysis of Results 

The system provides a broad spectrum of reports allowing you to examine and understand the factors underlying the results received from production planning. These reports can also be used as the basis for carrying out changes in preparation for an additional run of the planning simulation:

• Pre-planning reports help pinpoint problematic areas, such as unrealistic job sizes or too many lots, which can lead to undesirable planning results. The reports include: job times and quantities for planned order groups; the number of lots for an order group; plant-floor inventory; production demands for the order group; and work cell hours for the order group. These reports are normally run prior to the activation of production planning.

• Work plan reports display the work plan (Gantt chart), planned issues of materials from the warehouses, planned issues from one work cell to another and planned queue times. They include information on planned production times from a variety of perspectives (e.g., work cells, labor, production processes).

• Quantitative reports display planned quantities of parts to be processed over user-designated periods (a day, week, month), as well as the quantities planned to fill specific orders. The reports include: work cell quantities by period, periodic quantities per work cell and job quantities per order item.

• Period load reports display planned load distribution over the work cells. These reports can reveal those periods or work cells at which workloads are particularly heavy.

• Critical path reports analyze the critical path of designated ordered parts.

• Routing reports display the full routing of a given part and all its child parts or the routing of a given planned lot.

Lot Size Optimization 

As part of the Production Planning module, Priority offers a mechanism for optimizing lot sizes. This mechanism helps you handle a common dilemma encountered in work cells: on the one hand, a need to increase lot size as much as possible so as to save on set-up times; on the other hand, a need to decrease their size as much as possible in order to produce a smoother load distribution and to reduce cycle time and shipping costs.

Preparing Work Orders and an Issues Plan 

Once you are satisfied with the simulation results, you can run the Prepare Work Orders and Issues Plan program. This opens needed work orders and creates an issues plan for the designated period, serving as a basis for production control and purchase planning.

Scheduling data are translated into production data by opening work orders for goods that need to be manufactured. Such work orders can then be released for execution of the first operation in the part’s routing. For each work order (including those opened for sub-assemblies), you can view the sales order (or orders) it is intended to fill.

The resultant issues plan displays the quantities and dates on which issues are to be executed, based on anticipated shortages of the material on the plant floor.

The system provides an interface that can be used to download the work plan data so that it can be displayed graphically in MS-Project. Data can be displayed there by orders or work cells.

Production Planning Reports 

Planning Data Reports 

• Child-Parent Ratios (Planning)
• Work Cell Parameters
• Alternate Jobs
• Part Route Card
• Jobs
• Set-ups per Work Cell
• Set-ups per Job
• Tool Allocation

Pre-planning Reports 

• Job Times and Qtys for Group
• Number of Lots for Group
• Plant-floor Inventory
• WIP in Closed Work Orders
• Production Demands for Group
• Work Cell Hours for Group

Work Plan Reports 

• Work Plan
• Work Plan – Labor
• Issues Plan
• Issues to Work Cell
• Issues to Jobs
• Queue Time

Quantitative and Period Load Reports

• Work Cell Quantities by Period
• Periodic Quantities per Work
• Job Quantities per Order Item
• Work Cell Loads per Period
• Period Loads per Work Cell
• Work Cell Loads per Period & Group
• Period Lead by Jobs
• Manpower per Period
• Period Loads for Tools

Critical Path and Routing Reports 

• Critical Path
• Detailed Critical Path
• Routing by Part
• Routing by Lot

https://www.topprioritysystems.com/

The 2 Simple & Straightforward Methods for Market Sizing Your Business

 When you’re considering a new venture, one of the first things you should do is determine whether there is a valuable market for it.

Clifford Chi

Imagine putting in months of hard work to realize that there are only 100 people in the U.S. who will potentially buy your product. Knowing this early on will enable you to make educated business decisions and decide what’s worth pursuing.

What is market sizing?

Market sizing is the process of finding how big your product's audience or revenue could be. So, market size is the total number of potential buyers for a product or service and the potential revenue reach based on that population size.

When market sizing, you're calculating customer numbers to measure the growth potential of your business.

Why is market size important?

There are several reasons why every business should spend time sizing its market:

• Market sizing helps you figure out if your product is a worthy investment. Say you have a great idea for a product but there are only 100 people who would buy it. From there, you can decide if that population size is worth the cost of manufacturing, production, distribution, and more for your product.
• Market sizing helps you estimate profit and potential for growth. If you know how many people your business has the potential to reach, you can estimate how much revenue you can generate. This is valuable for both business owners as well as investors.
• Market size defines who you’re marketing to and what their needs are. No business can succeed without marketing. Knowing your market size is the first step in understanding your target market and their needs.
• Market sizing helps your business make better decisions. Understanding your market landscape, gaps, and opportunities will inform your decision-making. It can also help you set more realistic goals, assign resources, and refine your strategies.
• Market sizing helps your business minimize risk. Starting or expanding a business is inherently risky. Understanding your market can help you anticipate and prepare for challenges.

Market Size vs. Market Value

Market size is the total potential demand for a product or service. This number usually calculates the number of potential customers, units sold, or revenue generated. So, market size is an estimate of the overall market reach.

Market value refers to the financial worth or estimated market capitalization of a company or industry. It’s a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.

In summary, market size focuses on the potential market opportunity, while market value is the financial value of an individual company or an entire market.

Market Sizing Terms to Know

Before diving into how to figure out your market size, there are a few helpful terms you should get to know.

TAM

TAM stands for Total Addressable Market. This number is the maximum potential revenue or customer base that a company could achieve if it were to capture 100% of market share.

SAM

SAM stands for Serviceable Addressable Market. SAM is a part of the TAM that aligns with the company's resources, capabilities, and target customers.

SOM

SOM stands for Serviceable Obtainable Market. SOM is the part of the SAM that a company can get at its current scale. This figure may consider marketing and sales strategies, competitive positioning, and product demand.

Check out this post to learn more about TAM, SAM, and SOM and how to calculate them.

Target Market

A target market is a specific group of customers, industries, or segments that a company focuses on. It's the customer segment that's most likely to show interest, purchase, and appreciate a company's products or services.

Penetration Rate

Penetration rate refers to the percentage of a target market that a company has successfully captured. It shows the level of market share reached by a company in a specific market segment or overall market.

If you're a new business, you can calculate penetration rate by dividing your total customers by the number of potential customers in the target market. Then, multiply the result by 100 to get the percentage.

Learn more about market penetration here.

Market Segmentation

Market segmentation is the process of dividing the total market into distinct groups or segments. Usually, the people in these segments have common characteristics, needs, or behaviors.

Segmenting the market can help you better understand your target customers. It can also help you tailor business strategies, like marketing, to meet specific segment needs.

Value Proposition

A value proposition is the unique benefits that a company offers to its target customers. It differentiates a company's product or service from competitors and creates value for customers.

Understanding the value proposition is crucial in market sizing. This is because it can help you find the specific customer segments that will find the most value in your offer.

Try one of these free value proposition templates to draft your value proposition.

How to Calculate Market Size

1. Start with your total addressable market.
2. Find a group of customers to focus on within that target market.
3. Figure out how many of those customers are likely to buy your product.
4. Multiply that customer number by estimated penetration rate.

While calculating market size takes only a few steps, it's a crucial process. The steps below will help you understand the potential demand and revenue opportunities for your business.

1. Start with your total addressable market.

You can calculate your TAM by multiplying the total customers in a market by the annual value per customer. But before calculating, make sure you take a look at the tips below:

• Define your product or service. While developing a product can be quick, growing a business around a product is more complex. It's important to clearly understand your product or service and how it solves a problem or meets a need in the market.
• Find your market category. Some products fall within more than one industry or market category. This is the first step that will narrow your TAM. So, think carefully about what you expect customers to compare your offer to.
• Conduct market research. Gather relevant data and information about your potential users. If you're new to market research, check out this free market research kit, with research and planning templates.
• Analyze the competition. Conduct competitive analysis to figure out the market share and unique value of your top competitors.
• Define your total addressable market. With the research and analysis you've pulled together, create a realistic TAM estimate.

2. Find a group of customers to focus on within that target market.

Dig into the tips below to quantify the top customers in your market:

• Create your ideal buyer persona. Use the Make My Persona tool to outline the characteristics, demographics, and behaviors of your ideal customers.
• Segment your target market. Start dividing your target market into distinct segments. You might base segments on factors like age, location, interests, or buying behavior.
• Continue market research. Continue collecting data and insights about each segment. This will help you understand how big each segment is, as well as their needs, preferences, pain points, and purchasing habits. Your ongoing market research might include surveys, interviews, focus groups, or analyzing existing market research.
• Set pricing for your product or service. For some products, pricing is a deciding purchase factor. So, if you haven't already, set pricing or a price range for your products.
• Assess segments of your market and prioritize. Think about each segment's size, growth potential, and competition. It's also a good idea to think about how each segment aligns with your company's capabilities and resources. In short, don't just focus on segments that offer the most attractive opportunities. Make sure they align with your strengths and needs.
• Refine your buyer personas. With your prioritized segments, take another look at your ideal customer profile. This will give you a more useful buyer persona for your marketing and sales strategies.
• Confirm your SAM with market testing. Test your target segments with a product or service pilot group, measuring their responses and feedback.

3. Figure out how many of those customers are likely to buy your product.

This step will narrow your scope more intensely on the customers who need exactly what you have to offer. These are the people who are looking for you or a clear alternative to your competitors. To quantify this group:

• Create a customer journey map. From awareness to purchase, this process can help you map out the ideal customer path. From how you expect customers to discover your products to the blockers that might keep them from clicking buy, this step is useful for market sizing and beyond. Use these customer journey templates if you're new to this process.
• Estimate conversion rates. Use historical data, industry benchmarks, or industry research to estimate conversion rates. This can help you quantify expected numbers of leads, prospects, and customers in each segment.
• Figure out buyer intent. Create a ranking or score for each segment to measure their likelihood of purchasing your product. This can help you prioritize segments with the highest conversion potential.
• Create a SOM estimate with your data. The research above will add credibility to your market size estimate. It can also help guide your growth strategies.

4. Multiply that customer number by estimated penetration rate.

To calculate penetration rate, divide the SOM you calculated above by your TAM, then multiply by 100.

Once you have a calculation for your market size, you'll want to make sure you can trust that number. Keep your market sizing current with these tips:

• Confirm your data is accurate and reliable. As you complete your research, use reliable sources such as industry reports, market studies, or government databases. Also, check to ensure the data you're referencing is up to date.
• Keep up with market growth, seasonality, industry trends, tech advancements, regulatory changes, and economic conditions. These factors can affect both market size and customer demand.
• Review and update your market size estimates regularly. Market conditions change over time. Plan regular reviews of your market size, then update your calculations with new or relevant data.

Market Sizing Methods

There are two simple methods for market sizing your business. These straightforward processes can help you use data to gauge market size.

Top Down Approach

The first is a top-down approach, in which you start by looking at the market as a whole, then refine it to get an accurate market size. That would look like starting from your total addressable market and filtering from there.

Market Sizing Example

Let's say you want to launch a wine company. First, you'd want to figure out how many liquor stores are in the United States — this helps you figure out the total market to which you could theoretically sell your product.

After your research, you discover there are 50,000 liquor stores in the United States. Of that total list, you only want to sell to the New England area — including Massachusetts, Maine, and Rhode Island.

You decide your target market includes the 1,000 liquor stores in the New England area. From here, you conduct research and speak with alcohol distributors to find there's a roughly 40% success rate for wine distribution.

Using this as an example, we'd calculate the market size using the following formula:

1,000 liquor stores x 40% = 400 liquor stores

Then, if you assume each liquor store will result in $20,000, you can figure out potential revenue using the following formula:

400 liquor stores x $20,000 = $8,000,000

This means you stand to make $8 million if you penetrate 40% of the total market in the New England area.

Bottom-Up Approach

A bottom-up approach is the exact opposite – starting small and working your way outward.

This looks like first identifying the number of units you can expect to sell then considering how many sales you anticipate from each buyer and finally the average price per unit.

Market Sizing Example

Using the same wine example – Say you found recent data showing that the average cost of a wine bottle in New England is $10. A survey shows that the average consumer buys one bottle of wine a week, or 48 bottles a year. This means that the average consumer spends $480 per year on wine.

Next, you discover that the number of consumers (or households) you can expect to reach in the New England area is 16,000.

As a result, your market size is 480 x 16,000 = $8,000,000.

It’s important to note that both methods ignore the existence of competitors, customer churn rate, and other factors that impact sales. With this in mind, you'll want to stay conservative when estimating how much of the market size you'll win and use this as a starting point.

How to Leverage Your Market Size

You've your estimated market size — now what?

Market size helps your business answer the following questions:

• How much potential revenue can we earn from this particular market? In other words, is it even worth our time and energy?
• Is the market big enough to interest us?
• Is the market growing? Will there still be opportunities to earn revenue from this market in 3, 5, 10 years?

Market size is a critical number to know when you're looking for funding. Investors are going to need to know how much money they have the potential to make from a given market. Additionally, it's vital to recognize whether the potential revenue you can make outweighs your business' costs.

Once you have market size, you'll also want to consider how saturated the market already is with your competitors' products.

Ultimately, you can't capture the total addressable market (TAM) — some of those people will choose competitors' products over yours. So you'll need to figure out whether you have a shot at earning enough consumers out of the TAM to make this a worthwhile venture.

https://blog.hubspot.com/