Welcome to part two of our series on how to monetize new products. In the first post, we talked about getting aligned on product strategy. Today we’ll cover market analysis.

I’m going to skip ahead to the end. What you’re gonna need to be able to do in market analysis is understand this equation:

SOM x WTP = Revenue

Whoa – acronym overload. Let’s define these: TAM, SAM, SOM, and WTP.

TAM = Total Available Market. In other words, all of the possible customers for a product.

SAM = Serviceable Available Market. This is a subset of TAM, because it acknowledges how much of the market any product can address.

SOM = Serviceable Obtainable Market. This is a subset of SAM, and it is the estimate of how much of the market your company can capture.

WTP = Willingness to pay. In other words, how much would a customer be willing to spend to use your product?

If that’s feeling a little too abstract, let’s look at an example.

Ketaki Rao, product leader extraordinaire, shared this example from her time at Salesforce.

The team was developing the Customer Data Platform. The product vision was to help companies collect their own data from disparate sources in order to create a “single source of truth” about their customers.

• TAM: In this case, the Total Available Market was all companies with unconsolidated customer data. In other words, all companies, everywhere.
• SAM: Okay, not all companies. Companies without digital records wouldn’t actually be reachable by this product, whether Salesforce built it or another company built it. So, companies with modern digital records.
• SOM: Within that subset of “companies with modern digital records,” the vision for the product dictated that it become smaller – companies who use or potentially use Salesforce for their digital records.

Even without specific numbers, you can see how this type of analysis can help you better estimate who your customers are, and how many of them there are out there.  

Of course, for your own purposes, you want actual numbers to attach to each of these acronyms. Don’t get too hung up on the precision, but you want an accurate ballpark.  

In other words, it doesn’t matter if your SOM is actually 18 million customers and you estimate 20 million. It is a big issue if you estimate 200 million.

While calculating your SOM, you also want to figure out your customers’ WTP, or Willingness to Pay.

How to do this? Well, if you have existing customers, ask them about their experiences and collect data about their choices. Learn about the features they would be willing to pay for and at what price.

Once you’ve done this you have a good way of estimating how much revenue you can generate with your current (or projected) product. In other words, we’re right back where we started:

SOM x WTP = Revenue

This market analysis is what helps you estimate whether a feature or product you are considering building is worth it. You’re a startup, you don’t have infinite money to mess around with products that aren’t going anywhere.

If you’re looking to monetize, you want to build products that have a large obtainable market (SOM), where the market will pay (WTP) for it.

Good luck with your own market analysis, and we’ll see you in part 3 of this series where we talk about product-led growth.

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This article was written by Carolyn Abram, a freelance writer with a passion for technology. She also writes fiction and teaches writing classes in her home of Seattle. You can learn more about her at her website or on LinkedIn.