Marc Emmer is chairman of Optimize Inc. and an author, speaker, and consultant specializing in strategy and strategic planning.
Many business people want to think of themselves as strategists, but not everyone has the constitution to handle strategy well. Our primary job as strategists is to identify the markets where we can win and over-deploy our resources there. There are no magic bullets in strategy. It requires a methodical study of which products to deliver to which markets, supported by people, processes and technology. The provider must then weigh the weight of the competition against the size of the opportunity.
While the size of the market is critical to the strategy, I’ve found it to be vastly misunderstood.
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Understand TOM, SAM and SOM
We regularly see the same storyline play out Shark cage. Humble entrepreneurs show up and suggest that if they could win just 1% of a huge market, they would all get rich. Around this time, the sharks go through the painful process of opting out one by one.
While attacking the largest addressable market is a common refrain in our corporate culture, I think it’s fundamentally flawed. Startups, and even medium-sized private companies, usually don’t have the resources to compete with large competitors in large markets. Private companies are usually better off with niches.
Segmentation is the superpower of strategy. To understand the market potential of a product or service, the study of TAM, SAM and SOM is required.
• Total Addressable Market (TAM) is the total possible market that a provider could serve.
• Maintainable available market (SAM) is a segment of the TAM that a company could serve based on their business model.
• Maintainable Feasible Market (SOM) is the portion of the SAM that a company could reasonably capture. Think of it as SAM’s market share.
Addressable market case study
There was a time when PayPal decided that enter the market for payments (SAM). They felt there would be a move towards digital payments (SOM), where the company could gain a competitive advantage. PayPal identified a specific market niche where they could win – responding to the needs of millennials, who were not traditional payment customers. It turned out that the over-20s needed a system to exchange cash after splitting a rideshare or split a bill. Venmo is a poster child to get laser-focused on a usable market (SOM).
The broader banking, credit card payment and online money transfer sectors are dominated by multinationals such as Citibank, Bank of America, American Express and Square. The total transaction value of mobile payments in the peer-to-peer market is expected to increase $1,152.08 billion in 2023, with Venmo’s reach of P2P payment users in the US at almost 60% in 2021.
PayPal has achieved market leadership and a dominant position due to its understanding of a sub-segment of the market. It is usually better for a provider (especially a private company) to have a large share in a small market than a small share in a large market. It is difficult to maintain pricing power or win known customers as a secondary provider.
Understand growth rate
Simply understanding the size of a market is incomplete as the marketer must also understand its growth rate. When a market grows, it can absorb price increases and new competition. When a market is flat or in decline, it will experience commoditization, price compression, and margin erosion. Thus, the marketer should always try to join thriving, growing companies that can support the competitive rivalry of multiple companies.
Acceleration of specialization
Digital transformation is driving more hyperspecialization. Today, we have access to tools that enable marketers to deliver exactly the right message to the right prospect at the right time, based on their unique characteristics.
Artificial intelligence will only amplify hyperspecialization. Marketers will become more focused and detailed in identifying niche customers.
Masters of Segmentation
To counterbalance generalists like Amazon and Walmart, many providers are targeting specific consumer segments such as pet owners, LGBT, health and wellness, and home workers.
According to Shopify, popular consumer segments include: “price (luxury, moderate, discount), demographics (gender, age, income level, education level), quality (premium, handmade, frugal), psychographic (values, interests, attitudes), geographic (residents of a country, city or even neighborhood).”
The need to segment is just as important in business-to-business (B2B), as niche companies such as cybersecurity emerge and companies build affinity-based user bases.
The endgame
To execute the strategy well, you must invest in diligent analysis of the size of the market you want to address and delivering differentiated attributes to the small segments of the market where you can win. Strategy is less about magic bullets and more about doing the work it takes to build a sustainable competitive advantage.
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