3. Market Estimation

Market estimation is a critical process for understanding the potential revenue of the market you are entering. It allows you to assess whether the market is an opportunity worth pursuing (an untapped "blue ocean") or a highly competitive and saturated one (a "red ocean"). By estimating the size of the market, you can identify revenue potential, evaluate different market segments, and make informed decisions on which segments to target.

This document outlines key methodologies and steps for estimating a market, using tools such as TAM, SAM, and SOM to break down market size and potential.

Understanding Market Segments and Potential

Before diving into market estimation, it is essential to understand that the market can be divided into different segments, each with its potential. For instance, the delivery market is vast and contains different specialized segments, such as:

• Zé Delivery focuses on beverage delivery.
• iFood primarily focuses on restaurant deliveries.
• Rappi offers a more generalized approach with a variety of services.
• Loggi specializes in general freight deliveries.
• Zee.Now focuses on pet-related deliveries.

By analyzing these distinct market segments, businesses can pinpoint the most promising opportunities within their industry.

Using TAM, SAM, and SOM for Market Estimation

The TAM, SAM, and SOM framework is a helpful tool for estimating the potential market size at different levels:

• TAM (Total Addressable Market): This is the total revenue opportunity available if a product or service were to capture the entire market.
• SAM (Serviceable Available Market): This is the portion of the TAM that is within your target market, adjusted for your product’s segment or other specific characteristics.
• SOM (Serviceable Obtainable Market): This is the realistic share of the SAM that you can capture based on your business's capabilities and competition.

Example: Automotive Market (GM Spin)

To illustrate, let's use the automotive market, specifically focusing on the GM Spin, a car model in the 7-seater category, with data sourced from the ANFAVEA:

• TAM: The total automotive market is valued at $54 billion annually.
• SAM: The specific segment for 7-seater cars represents $3 billion annually.
• SOM: GM Spin, which holds a 69% market share, captures $2.2 billion annually.

In this case, the SOM is relatively high because the Spin dominates its market segment, but not all businesses will have such dominance.

Steps to Estimate a Market

For new products or emerging markets, market estimation can be more complex and involves the following steps:

1. Define the Market

Start by clearly defining the market you are estimating. This includes identifying the specific product or service and the target audience. For example, let’s say you want to launch a business renting electronic equipment. The market for "electronics" is vast, so narrowing the focus is essential. In this case, we could define the segment as gaming computers and peripherals for an audience of young gamers aged 16 to 34.

2. Use Top-Down or Bottom-Up Methods

There are two main methods for calculating the market size:

• Top-Down Method: Begin with an overarching figure and apply assumptions to narrow it down to the relevant segment. This method relies heavily on external data sources, such as industry reports or government data.
• Bottom-Up Method: Start by estimating revenue or unit sales at a small level (e.g., per unit or customer) and then scale up to the total market size. This approach often requires primary research, such as surveys or interviews.

Example: Gaming Computer Rental Market (Top-Down)

Using a top-down approach, let’s estimate the gaming computer rental market:

• The total electronics industry in Brazil generated BRL 156 billion in 2019.
• Of this total, 31% came from the computing sector, giving a TAM of BRL 48.3 billion annually for computing products.

Example: Gaming Computer Rental Market (Bottom-Up)

Using a bottom-up approach, we could estimate market size by looking at the average price of a gaming computer and the total addressable audience:

• Average price of a gaming computer: BRL 5,000.
• Cycle life of a computer: 5 years.
• Target audience: 34 million people (based on research that 51% of Brazil's 77 million gamers fall within the 16-34 age group).

With this approach, the bottom-up TAM is estimated at BRL 34 billion annually, slightly different from the top-down result. In real-world applications, both methods provide valuable perspectives, and you can choose the most reliable approach based on data quality.

3. Calculate SAM (Serviceable Available Market)

Once you’ve estimated the TAM, the next step is to refine it into the SAM by focusing on the specific segment that your product will target. This involves adjusting the TAM based on geographic reach, specific product features, or customer demographics.

For example, if we limit our hypothetical gaming computer rental business to the Southeast region of Brazil (41% of the total target audience), and focus only on computers priced above BRL 3,000 (30% of the market), our SAM would shrink significantly. Based on additional assumptions (e.g., 20% of gamers would rent computers), we estimate a SAM of BRL 800 million per year.

4. Calculate SOM (Serviceable Obtainable Market)

Finally, the SOM represents the realistic portion of the SAM that your business can capture. Estimating SOM involves assessing competition, your business's competitive advantage, and market entry strategy.

In our example, let’s assume that:

• There are no existing competitors offering gaming computer rentals, but there are three major players in the sales market who could potentially enter the rental space.
• As a new business model, it might take time for customers to adopt this rental option.

Given these factors, we might conservatively estimate capturing 2% of the SAM, resulting in a SOM of BRL 16 million per year.

Iterative Process

It’s important to remember that market estimation is not a one-time, linear process. As you gain more information about your product, competitors, and target audience, you should revisit and refine your market estimates. Regular iteration ensures that your business remains aligned with current market realities.

Conclusion

Estimating the market is essential for making informed strategic decisions and understanding your product's potential. By leveraging tools like TAM, SAM, and SOM, and using both top-down and bottom-up approaches, you can calculate the total market size, narrow it down to the available market, and realistically assess what portion of that market you can capture.

In some cases, precise data may not be readily available, especially for new products or markets. In these situations, creativity and alternative estimation methods—such as estimating audience size or customer volume—can help you get a clearer picture of market potential.