Most Startups experience the same challenge:
🔮 Founders see a problem to be solved or a need to be satisfied
💡 They find an amazing idea for the problem
🧪 They know how to build a product/service to turn that amazing idea into something real
The Problem: "Amazing" is a very subjective term and an idea is only "amazing" if it is solving problems of a well-defined target market
In the following, you will find everything you need to know about "🎯 Target Markets"
1. Why should you define your target market?
🎙 Craft specific messaging to reach the right audience
Determining a target market, allows you to focus on your marketing efforts in the most effective way. Messages will be clearer and hence better targeted which will in turn increase reach and decrease cost.
💬 Gather constant feedback to improve your product
Focusing on one customer group will help you build a better product as you will be able to get instant feedback and understand their real needs. This will enable you to fix their pain points which in turn will make them come again and stay as active user (increase in retention rate).
2. How do you define your potential customers?
📰 Useful resources:
How to Define Your Target Market
Given the current state of the economy, having a well-defined target market is more important than ever. No one can afford to target everyone. Small businesses can effectively compete with large companies by targeting a niche market. Many businesses say they target "anyone interested in my services."
Find Your Customers With A Target Market Analysis
Once you've gathered all the information you can about your customers, you can then make a plan to market to them. Consider your new insights while pricing a product. You could use the market data to adjust your products or services to suit your potential customers better.
3. How do you define the size of your target market
Bottom-up vs. Top-Down
To calculate TAM, SAM and SOM two methods can be used to make your estimations:
- A bottom-up analysis starts with the core business figures (number of clients, amount of product sold, average price point) and uses this data to make assumptions about the larger market as a whole.
- A top-down estimate looks at larger, macro-economic trends within a market to narrow-down and determines what percentage a company could capture.
- To do so, founders rely on outside market reports from industry analysts to make their estimations.
- The procedure would look as followed:
- Analyze the international market as a whole
- Analyze national economies
- Analyze each sub-sector of the national market
- Analyze all potential competitors within those sub-sectors
Calculation of TAM, SAM, SOM
Total Addressable Market (TAM):
Serviceable Available Market (SAM):
Serviceable Obtainable Market (SOM):
Three ways to come up with your SOM:
- Looking through historic performance and projection forecasts to look at where revenue could be in five years’ time. That will give a waypoint to target.
- Handpicking select geographies or markets from the SAM and assigning a targeted market share percentage based on local competitive environments.
- Referring to third-party research on the sector to ascertain how market share currently stands. The more distributed, the better in terms of being able to realistically win share from others.
📰 Useful Resources:
TAM Methodology: An Explanation and Example of Total Addressable Market Analysis
What is TAM? Total addressable market (TAM) demonstrates the entire revenue opportunity that exists within a market for a product or service. There are four methods for calculating TAM: top-down approach, bottom-up approach, value theory, and referring to external research.
TAM, SAM, SOM: Calculating Market Size For Your Venture
Now, this is extremely important when it comes to investors. Consider that the average VC (venture capitalist) firm speaks to around companies before narrowing it down to a list of 10 - just 1% of their initial outreach. How do they narrow down their choice from the thousands of great ideas they come across?