How large is our target audience, and how much of it can we capture? - The Why, Who, What, and How of Building a Product

How large is our target audience, and how much of it can we capture? - The Why, Who, What, and How of Building a Product

3. How large is our target audience/market, and how much of it can we capture?

You already understand why you should build the product and who is your target audience but these insights only take you so far. The next step is figuring out how many people actually need your product and, more importantly, how many of them are willing to pay for it.

This is a challenging task since market assumptions are rarely accurate. For instance, you might believe that everyone would benefit from your new spreadsheet app, but that’s an overly optimistic and likely unrealistic assumption. The key lies in estimating a realistic market size and determining the portion of that market you can effectively capture with your current resources.

To get a clear picture, you need to define your TAM, SAM, and SOM (your Target Market):

  • TAM (Total Addressable Market): The total potential market size, representing everyone who could use a product like yours.
  • SAM (Serviceable Available Market): The segment of the TAM that would actually need and could purchase your specific solution.
  • SOM (Serviceable Obtainable Market): The portion of the SAM that you can realistically capture in the short term with your current resources and strategies.

Estimating Your Market

Let’s take the example of your spreadsheet app to walk through the process:

  1. Pick a Market: Start by identifying a geographic or demographic segment that shares common characteristics, such as a country or language.
  2. Utilize Published Data: Use census data or other government statistics to establish a baseline, like the percentage of the population working in offices.
  3. Segment by Business Type: Narrow down your audience by considering the types of businesses likely to use your product—corporations, SMEs, startups, freelancers, etc.
  4. Determine Your TAM: Estimate how many of these businesses or individuals could use a product like yours.
  5. Identify Your SAM: What percentage of these potential users actually need a product like yours and are likely to buy it?
  6. Target Your SOM: Of the SAM, determine which portion you can realistically target with your current resources and strategies.

Finally, ask yourself: Is this a large enough market to play in?

Assessing your TAM, SAM, and SOM helps ensure that your product not only has a viable audience but also that your business can capture a significant enough portion to thrive.

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