In the business world, the art of market sizing is necessary for discovering new opportunities, measuring risks, and preparing to succeed in the long run. Regardless of whether one is a startup founder, an investor, or a market analyst, knowing one’s market size helps in strategic planning, channeling investments, and making essential decisions in business.
The most trusted methodologies for market sizing are TAM, SAM, and SOM. These are known as Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). Each will provide you with different information concerning your market potential.
This post will explain the concepts of TAM, SAM, and SOM, their significance, and how you can calculate them for your industry.
What Are TAM, SAM, and SOM?
Before venturing into the realm of calculations, you must know what each term in the given terms means and how each one is supposed to contribute to market sizing.
- TAM – Total Addressable Market
TAM is said to be the total revenue opportunity available if a product or service attains 100% market share. In other words, it is the absolute market potential without considering constraints like competition, geographic limitations, or business capacity.
For example, if it is the introduction of new smartphones, TAM would mean the total number of people who might ever want to buy a smartphone worldwide.
- SAM – Serviceable Available Market
While TAM represents the total market potential, SAM narrows it down and confines it to just that market subset that your product or service can target based on your business model, geographical reach, or other market constraints. Therefore, SAM represents customers that a company can serve within its addressable market.
Using the smartphone example, SAM would refer to the number of people in your target geographic region interested in smartphones within a specific price range or category your product fits into.
- SOM – Serviceable Obtainable Market
SOM is the smallest portion or subset. It specifically refers to the portion of SAM that your business is realistically capable of capturing, including competition, current market share, operational capacity, and brand influence.
SOM is one of the key elements required for short-term sales and marketing strategies since it directly reflects your attainable customer base.
In the case of a smartphone, SOM would be the number of people in your geographic region who are likely to buy your specific brand of smartphone, taking into account competition and your strategy for market penetration.
Relevance of TAM, SAM, SOM in Business Strategy
1. Guiding Market Entry Decisions
Calculating TAM, SAM, and SOM is also important in determining whether your product or service has the potential or if entering a market really makes sense. For example, if your SOM for the product is too small to justify the investment, you can pivot on or redefine the approach you take for your offering.
2. Gaining Investor Confidence
Investors need clarification on market potential. When you can prove to an investor that you have done your homework and calculated the TAM, SAM, and SOM, you send a message of resourcefulness and thus gain confidence in your ability.
3. Resource Allocation
These metrics will inform the business of how much to invest in marketing, sales, or product development. When the SOM is small, aggressive scaling efforts are justified since more competitive marketing is required. On the other hand, when the SAM is big with very few competitors, aggressive scaling is called for.
4. Strategic Market Expansion
As your business grows, TAM, SAM, and SOM help you determine how many market shares remain to be captured. This information helps you make decisions about when and where to expand.
Steps to Use and Calculate TAM, SAM, and SOM for Your Business
Understanding and applying TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market) is critical for assessing the market potential of any business.
These metrics provide valuable insights into the size of your market, which is essential for strategic planning, securing investments, and allocating resources effectively.
While the theory behind TAM, SAM, and SOM sounds great, calculating these metrics and using them effectively can be challenging. This guide breaks down how to define, calculate, and utilize TAM, SAM, and SOM for your business in practical steps.
Step 1: Define Your Market
Before you can calculate TAM, SAM, and SOM, it’s important to have a clear understanding of your market. You need to define what exactly you are marketing, whether it’s a specific product, a service, or a category of products. To define your market, consider the following factors:
- Geographic location: Which regions are you targeting? This could range from local to international markets.
- Gender: Is your product or service gender-specific, or is it intended for all genders?
- Age group: What is the age range of your target audience? For example, are you targeting millennials, seniors, or another demographic?
- Characteristics: Are there specific attributes that define your target audience? This could include lifestyle, interests, or habits.
- Problem your product solves: What need or problem does your product address? Knowing this can help refine your audience segmentation.
By clearly defining these aspects, you will have a better grasp of the potential market size and can more accurately calculate TAM, SAM, and SOM.
Step 2: Calculate TAM (Total Addressable Market)
TAM is the total market demand for your product or service if there are no limitations, such as geography, competition, or business capacity. Essentially, TAM represents the total revenue opportunity available if you were to capture 100% of the market. There are three primary ways to calculate the TAM:
- Top-Down Approach
TAM is estimated by industry reports, market research data, and macroeconomic trends. You start with the general market size and narrow it to your product or service category.
For example, if industry reports say that the global smartphone market is worth $500 billion, you can make that your TAM for a new smartphone product.
- Bottom-Up Approach
Here, you consider the number of customers within your target segment and the pricing for your product when calculating TAM. This is more accurate but demands detailed data.
For instance: Price per Unit: $500 for a smartphone
Potential Customers: 1 billion numbers of smartphone users in the world
Based on these figures, the TAM = $500 * 1 billion = $500 billion.
- Value Theory Approach
This approach to calculating TAM is based on the value created for customers through your product or service. This is usually used for new or disruptive products where existing market data may not be available.
Example: Your product saves customers $100 monthly in phone bills, and your projected user base is 1 million people. Thus, TAM will be $100 million annually.
Step 3: Calculate SAM (Serviceable Available Market)
While TAM represents the total market, SAM narrows it down to the portion of the market that your product or service can serve. This is based on factors like geography, customer demographics, or the specifics of your business model. Here’s how to calculate SAM:
- Refine by Geography: If you only plan to sell your product in the U.S., you would narrow your TAM to focus on that geographic region. For example, if 20% of the global population of women aged 25 to 65 live in the U.S., you would reduce your TAM by 80%, leaving you with a SAM that reflects only the U.S. market.
- Refine by Product or Service Type: If your business focuses on a specific segment of the market, you will need to narrow your audience further. For instance, if you sell luxury women’s professional clothing, your SAM would be limited to women who can afford and are interested in purchasing high-end, work-appropriate attire.
- Calculate Potential Revenue: Like TAM, you calculate SAM by multiplying the number of potential customers in your refined market by the price of your product or service.
For example, if 10 million women in the U.S. fit your demographic and product focus, and your product sells for $500, your SAM would be $5 billion (10 million women x $500 per product).
Step 4: Calculate SOM (Serviceable Obtainable Market)
SOM is the portion of the SAM that your business can realistically capture, taking into account factors such as competition, market share, and your operational capacity.
Here’s how to calculate SOM:
- Refine by Customer Affordability and Behavior: Consider the financial situation and lifestyle of your target audience. Not everyone in your SAM will be able to afford or be interested in your product. For example, women living paycheck to paycheck may not be able to purchase luxury clothing, even if they fit your demographic.
- Analyze Competition: Examine your competition to understand what portion of the market they are serving and how much of the remaining market is available for you to capture. If there are several established brands with strong customer loyalty, your SOM will be lower.
- Estimate Your Market Share: Based on your marketing efforts, distribution channels, and competitive analysis, estimate the percentage of the SAM that you can realistically capture. For instance, if you expect to capture 5% of the U.S. luxury women’s professional clothing market, and your SAM is $5 billion, your SOM would be $250 million (5% of $5 billion).
SOM is the most realistic and conservative estimate of your potential market, which helps you set more achievable short-term business goals.
Step 5: Identify Opportunities and Challenges
Once you’ve calculated TAM, SAM, and SOM, the next step is to use this data to identify opportunities and challenges within your market. Here are some questions to ask:
- What is the current state of the market? Understanding market trends can help you anticipate changes and adapt your strategy accordingly.
- What do your competitors do well or poorly? Analyzing competitors can reveal areas where you can outperform or differentiate your product.
- Are there any gaps in the market? Look for unmet needs or underserved customer segments where your product can fill a gap.
- What challenges might you face? Consider external factors such as economic conditions, shifts in customer preferences, or emerging technologies that could impact your market share.
Using this information, you can fine-tune your marketing and product strategies to better position your business for success in capturing market share.
Conclusion
TAM, SAM, and SOM are business outlook instruments that organizations must use to evaluate and measure the potential of their markets. Using these measurements, companies allocate their available resources more efficiently, focusing on the right mix of customers for growth in their segment of the market.
Nonetheless, all these calculations require both strong data and realistic assumptions for validity. Thus, you should regularly update your market-sizing models to incorporate changes that suit the market’s changing conditions. You can take help from an expert company like Citation-AMP, if you have any doubts regarding this.