If you're a business owner or a marketer in an enterprise-level business, an SMB, or a challenger brand, you've probably navigated through the complexities of market sizing. But have you fully leveraged TAM, SAM and SOM in your strategy?
No, these aren't just acronyms to add to your jargon collection, but rather crucial components of a data-driven approach to market estimation—essential for making informed decisions that can propel your business forward.
But fear not! You don't need to be a data scientist to understand their value! In this blog, we'll simplify what TAM, SAM and SOM are, highlight their significance and guide you through calculating them with insights, offering a step-by-step approach, not just numbers.
What is market sizing?
Market sizing is the process of estimating the potential size of a market for a particular product or service. By accurately sizing the market, businesses can better understand the potential revenue and profitability of a particular product or service and make data-driven decisions that can lead to business success. Understanding your market size is important not only for launching new products but also for entering new markets and optimizing your current market strategies.
What is TAM SAM SOM?
TAM, SAM, SOM is a framework used in business and marketing to estimate the potential market size for a product or service.
- TAM: Total Available Market. This is the total market demand for a product or service, encompassing the entirety of a defined market assuming there are no limitations on factors such as geography, price or distribution.
- SAM: Serviceable Available Market. This is the segment of the TAM that a business can realistically target and serve, taking into account limitations such as geography, pricing and distribution.
- SOM: Serviceable Obtainable Market. This is the specific portion of the SAM that a business can realistically capture, based on factors such as the company's marketing and sales capabilities, competition and market saturation.
In short, TAM represents your ultimate market opportunity, SAM narrows it down to the segments you can effectively target, and SOM focuses further on what you can actually achieve in the near to mid-term.
How to use TAM SAM SOM for market sizing
Here’s how to run a TAM SAM SOM analysis for market sizing:
- Define the market: Define the market that you are analyzing. This could be a specific product category or service, ensuring a clear focus for your analysis.
- Calculate the TAM: Estimate the Total Addressable Market (TAM) by assessing the total demand for the product or service across the entire market. This step involves comprehensive market research to identify all potential customers, regardless of their current engagement with similar products or services.
- Calculate the SAM: Determine the Serviceable Available Market (SAM) by estimating the portion of the TAM that your business can realistically serve, considering your unique capabilities and market positioning.
- Calculate the SOM: Assess the Serviceable Obtainable Market (SOM) by estimating what portion of the SAM your business can realistically capture, factoring in your competitive advantage, current market share and sales strategies.
- Analyze the data: Review and interpret the data to spot market trends, uncover potential growth opportunities, and identify areas for strategic improvement.
- Develop strategies: Utilize the insights gained to craft strategies aimed at increasing your market share and capturing a larger slice of the SOM. (This is where our expertise shines! Partner with us for tailored strategies and insights).
Why are TAM SAM SOM important?
TAM, SAM and SOM are important market-sizing concepts that can help businesses unlock new market opportunities, precisely target customer segments and fine-tune their marketing efforts and resources to achieve their business goals. They assist businesses in:
- Understanding the market potential: By estimating the total market demand (TAM), a business can grasp the full potential size of the market and the existing opportunity for their product or service.
- Identifying target markets: By estimating the serviceable available market (SAM), a business can identify the specific markets they can realistically target and serve, based on factors such as geography, pricing, and distribution.
- Determining market share: By estimating the serviceable obtainable market (SOM), a business can determine the percentage of the SAM they can realistically capture. This insight is instrumental in setting attainable goals and crafting realistic sales and marketing strategies.
- Making informed business decisions: TAM SAM SOM analysis provides businesses with valuable market data that can inform important decisions, such as product development, pricing, and marketing strategy.
Understanding TAM, SAM and SOM is vital for any business looking to navigate its market with precision. These concepts don't just shed light on potential market size; they pave the way for strategic decision-making, allowing businesses to focus their efforts where they're most likely to excel. By harnessing these insights, companies can better allocate resources, refine their marketing strategies, and set realistic goals, ultimately enhancing ROI and driving growth in a targeted, effective manner.
How businesses can use a TAM SAM SOM analysis to make strategic decisions
Utilizing TAM, SAM and SOM analyses provides a foundational approach for crafting strategic business decisions, guiding businesses to not only chart but also navigate their growth trajectory effectively.
- Uncovering Growth Opportunities: By understanding the potential size of the market (TAM), the portion of the market they can realistically target (SAM), and the portion of the market they can capture (SOM), businesses can identify opportunities to grow their market share and expand their customer base.
- Optimizing Resource Allocation: Businesses can use a TAM, SAM, SOM analysis to allocate resources such as marketing and sales budgets, research and development expenses, and production capacity in a way that maximizes their return on investment.
- Crafting Precise Marketing and Sales Tactics: Businesses can develop targeted marketing and sales strategies that reach their ideal customer base and effectively communicate the unique value proposition of their product or service.
- Assessing Market and Product Viability: A TAM, SAM, SOM analysis can help businesses evaluate the potential of a new market or product. By estimating the size of the TAM, analyzing the competition and target audience, and determining the portion of the market they can realistically target and capture, businesses can evaluate the potential profitability and viability of a new market or product.
In essence, TAM, SAM and SOM not only equip businesses with the insights needed for strategic planning but also enhance decision-making capabilities, paving the way for sustainable growth and competitive advantage.
What business questions does a TAM SAM SOM analysis answer?
- What is the total size of the market for a particular product or service (TAM)?
- What is the size of the market that our business can realistically serve (SAM)?
- What is the size of the market that our business can realistically capture given our resources and competitive landscape (SOM)?
- What are the specific segments of the market that are most likely to purchase our product or service?
- How can we develop marketing strategies that effectively reach and engage these target segments?
- What are the growth opportunities and potential revenue streams for our business within the identified target segments?
- What resources and investments will be necessary to capture a larger share of the target market and increase revenue?
- What is our long-term business viability?
How to calculate TAM (Total Addressable Market)
Calculating the Total Addressable Market (TAM) helps you understand the broad revenue potential of your product or service within a target market. The formula for TAM is straightforward.
TAM Formula
The formula for TAM is:
TAM = (Total Number of Potential Customers)×
(Average Annual Revenue per Customer)
To find your TAM, you need two key pieces of information:
- Total Number of Potential Customers: Estimate how many people or businesses could potentially use your product or service.
- Average Annual Revenue per Customer: Estimate how much each customer would spend on your product or service annually.
TAM Example
Imagine launching an e-commerce platform for handmade goods. To calculate TAM:
- Potential Customers: Estimated at 10 million who are interested in handmade goods online.
- Average Revenue per Customer: $500 annually.
The TAM calculation is:
TAM = 10,000,000 × $500
TAM = $5,000,000,000
Your e-commerce platform's TAM for handmade goods is $5 billion. Remember, this figure is an estimate that can fluctuate based on competition, market trends and consumer behaviors.
How to calculate SAM (Serviceable Addressable Market)
Serviceable Addressable Market (SAM) reflects the revenue opportunity available from the portion of the TAM that your business can realistically serve.
SAM Formula
The formula for SAM is:
SAM = (Total Number of Potential Customers)×
(Percentage of Customers You Can Serve)×
(Average Annual Revenue per Customer)
To calculate SAM, you’ll need to have:
- Total Number of Potential Customers: Your TAM or a subset that could potentially engage with your product or service.
- Percentage of Customers You Can Serve: Realistically, the portion of these customers your business operations can support.
- Average Annual Revenue per Customer: How much revenue you expect each customer to generate annually.
SAM Example
Consider launching software for small businesses. To calculate SAM:
- Potential Customers: 1 million small businesses.
- Percentage You Can Serve: 10%.
- Average Revenue per Customer: $1,000 annually.
The SAM calculation is:
SAM = 1,000,000 × 0.1 × $1,000
SAM = $100,000,000
The SAM for your software aimed at small businesses is $100 million. This figure helps prioritize market opportunities and guide resource allocation for growth and profitability.
How to calculate SOM (Serviceable Obtainable Market)
SOM estimates the portion of SAM that your business can realistically capture in the short to medium term.
SOM Formula
The formula for SOM is:
SOM = (Total Number of Potential Customers)×
(Percentage of Customers You Can Serve)×
(Percentage of Market You Can Capture)×
(Average Annual Revenue per Customer)
Calculating SOM involves:
- Total Number of Potential Customers: Begin with your TAM or a specific segment more relevant to your product/service.
- Percentage of Customers You Can Serve: The realistic share of these customers your business infrastructure can support.
- Percentage of Market You Can Capture: The realistic share of the market you expect to capture, considering competition and market dynamics.
- Average Annual Revenue per Customer: Expected revenue from each customer annually.
SOM Example
Imagine you’re launching a new food delivery service in a city with 1 million potential customers:
- Customers You Can Serve: 20%.
- Market Share You Can Capture: 5%.
- Average Revenue per Customer: $1,000 annually.
The SOM calculation is:
SOM = 1,000,000 × 0.2 × 0.05 × $1,000
SOM = $10,000,000
The SOM for your food delivery service is $10 million. This calculation assists in setting realistic sales and growth targets.
Differences Between TAM, SAM and SOM
TAM, SAM and SOM are important metrics for entrepreneurs, startups, and businesses aiming to gauge the potential size and accessibility of their target markets. Understanding the differences between TAM, SAM and SOM is essential for effective business planning, market analysis, and growth strategy development. Here’s a closer look at these pivotal market sizing metrics:
- Total Available Market (TAM): Your Market Potential - TAM represents the entire market for your product or service, assuming you can reach everyone. It’s the ultimate market size if there were no competition or resource limits. Use TAM to dream big and set the ceiling for your market aspirations.
- Serviceable Available Market (SAM): Your Target Market - SAM narrows down TAM to the portion you can actually target given your current business model, resources and geographic reach. It’s where you focus your marketing and sales efforts, representing your more immediate, reachable market.
- Serviceable Obtainable Market (SOM): Your Market Share Goal - SOM zooms in further to the part of SAM you can realistically capture in the near term, considering your competition and unique value proposition. SOM helps set achievable sales targets and forecasts your slice of the market.
Remember: TAM is the total potential market demand, SAM is the portion of the TAM that a business can realistically target, and SOM is the portion of the SAM that a business can realistically capture.
Implementing Insights: From Theory to Practice
Steps to Apply TAM, SAM, and SOM in Your Business Strategy
Embarking on the journey of market sizing with TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market) is pivotal for crafting a visionary business strategy. Start by identifying your TAM to understand the full potential of your market. Dive deeper into SAM by focusing on the segments you can realistically reach with your current products and channels. Finally, zone in on your SOM, the portion of the market you can capture in the short to medium term. This granular approach enables businesses to prioritize resources effectively, tailor marketing efforts, and set achievable targets. By integrating these metrics into your strategy, you align your vision with market realities, setting a solid foundation for growth and innovation.
Common Pitfalls to Avoid
While navigating the complexities of TAM, SAM, and SOM, businesses often encounter several pitfalls. Common mistakes include:
- Overestimating the market size, leading to unrealistic expectations and strategies that are not grounded in reality.
- Neglecting the competitive landscape, which can significantly affect your serviceable markets.
- Relying solely on secondary research without validating assumptions through primary data can skew your market understanding.
To circumvent these obstacles, ensure thorough market research and analysis, maintain a realistic outlook, and continuously validate your findings. Embrace the disruptor’s mindset: question, refine and adapt, ensuring your strategies are both ambitious and attainable.
Conclusion
So, there you have it!
TAM, SAM, and SOM aren't just acronyms; they're your roadmap to strategic growth. At Seer, we understand the power of data-driven decision-making. Whether you're looking to understand your market potential or identify target markets, our team is here to provide the insights and strategies needed for your success.
Start your journey towards informed strategic planning today with Seer's Analytics & Insights team—because understanding your market size is just the beginning. With decades of expertise and advanced tools like our proprietary data platform, we're not just equipped to help you calculate—we're here to transform these insights into strategies that unlock your business potential.
