Starting a new company comes with a lot of energy and enthusiasm. You may have also envisioned its success in the market and earning huge profits from it. For this vision to come true, you must have a fair idea of the market you are operating in – you will have to know the size of the market and the share you have in it.

When you know your market size and share, you can set a realistic revenue goal and forecast your profit potential.

If you are yet to find them, this guide will be of immense help. The guide discusses TAM, SAM, and SOM in detail – the three key metrics to calculate your market size and share.

Let us get started.

TAM SAM SOM

These acronyms sound quite interesting, aren’t they? They stand for –

1. TAM – Total Addressable Market
2. SAM – Serviceable Available Market
3. SOM – Serviceable Obtainable Market

The three metrics give you the necessary inputs about the market that you are operating in. They furnish the necessary details associated with the businesses’ market size and accessibility. This is also a key reason why these metrics serve as the key components of both – a business plan and an investor’s pitch. They are also important when drafting your marketing and sales strategies.

Let us now discuss each of the metrics in detail

TAM – Total Addressable Market

TAM – the Total Addressable Market – the broadest metric of the three – refers to the maximum market demand for your product/ service. Taking a broader view, TAM gives you the figure of the maximum revenue you could generate in the market of operation.

The Total Addressable Market is extremely useful for businesses, especially B2B start-ups, as it provides insights into the market’s potential for growth. A critical point to remember is that TAM calculations do not consider constraints such as geographic boundaries, competition, marketing budgets, etc.

Importance of TAM

The TAM is the very first market calculation in a business case and is also an especially important piece of information when identifying new business opportunities. Venturing into a new business without knowing the number of people interested in your offering is baseless. At the same time, lacking the knowledge will make it extremely difficult to validate the revenue and growth assumptions.

SAM – Serviceable Available Market

While the Total Addressable Market (TAM) calculation paints quite a rosy picture of opportunity, it is important to understand that it is not likely for you to capture the entire market. For instance, you might have to share your market share with the competition, or your target audience might prefer an alternative product. Therefore, you should be considering SAM to narrow the market.

The Serviceable Available Market is the market segmentation metric that answers an important question “what part of your TAM is the most appropriate for you?” By taking factors such as geographical reach, production capacity, and diversification, SAM provides a fair, realistic estimate of the potential customers for your product or service. SAM provides you with the market percent that you should be addressing based on your business model.

Importance of SAM

SAM, a subset of TAM, eliminates irrelevant market segments your company will not be able to serve. As these segments are eliminated, the target market becomes narrow. At the same time, it also serves as a good reminder for evaluating factors such as competition, culture, resources, etc., impacting the business.

As SAM makes the target segment more precise, it also helps in enhancing the efficiency of the activities of your marketing & sales teams. Additionally, investors emphasize SAM as it highlights the business’ growth and success prospects in the market.

SOM – Serviceable Obtainable Market

The Serviceable Obtainable Market (SOM) is yet another important part of the market segmentation analysis. SOM, also known as the Share of Market, is the subset of SAM and gives the most realistic estimate of the market share that the business can capture in the immediate future. The metric gives a short-term estimate, i.e., 3 to 5 years.

Importance of SOM

Serviceable Obtainable Market is a particularly important measure for organizations trying to establish their financial projections. SOM calculations also serve handy when making decisions related to the operations of the firm.

For instance, it makes it possible for businesses to create sales projections based on the potential market share that they may have. At the same time, SOM also helps businesses compare themselves with their competitors to analyze their position in the market. This could be useful when drafting strategies to position and set the business offering apart from competing products.

A Serviceable Obtainable Market is also helpful for identifying future growth possibilities and even the gaps in the market. It can also help come up with distinctive strategies the company could use to advertise its product and/or to create and launch new products. This aids investors in doing a more thorough analysis of each possibility.

How to Use TAM, SAM, and SOM 

Using TAM, SAM, and SOM involves a step-by-step process to analyze the market potential and make strategic decisions. Here’s how you can use these metrics effectively: 

1. Define your product/service and target market: Clearly define the product or service you offer and identify the specific market segment you intend to target. The more precise your definition, the more accurate your analysis will be. 

2. Calculate TAM (Total Addressable Market): Estimate the total market demand for your product or service. This can be done through market research, industry reports, and data analysis. Consider factors such as the total population of potential customers, their needs, and the total revenue generated by similar products/services in the market. 

3. Calculate SAM (Serviceable Available Market): Identify the portion of the TAM that your company can realistically target and serve. SAM is determined by considering factors such as geographical reach, distribution channels, and the capabilities of your business to meet customer needs. 

4. Calculate SOM (Serviceable Obtainable Market): SOM is the realistic market share you can achieve within a specific timeframe. This involves researching and analyzing your competition, understanding your unique selling points, and estimating how much of the SAM you can capture with your marketing and sales efforts. 

5. Set realistic business goals: Use the TAM, SAM, and SOM figures to set specific, measurable, achievable, relevant, and time-bound (SMART) business goals. These goals should align with your company’s growth objectives and reflect the market opportunities you have identified. 

6. Develop marketing and sales strategies: Based on the TAM, SAM, and SOM analysis, create targeted marketing and sales strategies. Tailor your messaging and promotions to reach the identified market segments effectively. Allocate resources wisely, focusing on areas where you can make the most impact. 

7. Monitor and adjust: Regularly monitor your progress in capturing the SOM and be prepared to adjust your strategies as needed. Stay updated on market changes, customer preferences, and competitive landscape to remain agile in your approach. 

8. Reassess periodically: Market conditions change over time, so it’s essential to reassess TAM, SAM, and SOM periodically. As your business grows or new opportunities arise, these metrics may shift, and you’ll need to adapt your strategies accordingly. 

9. Use for investment and funding decisions: TAM, SAM, and SOM are crucial when seeking investment or funding. Potential investors will evaluate your understanding of the market and the potential for your business to scale. Presenting well-researched and realistic TAM, SAM, and SOM figures can enhance your credibility and attract investors. 

By using TAM, SAM, and SOM effectively, businesses can make informed decisions, focus their efforts on viable market opportunities, and increase their chances of success in their chosen markets. These metrics provide a solid foundation for strategic planning, resource allocation, and overall business growth. 

Calculating TAM, SAM, SOM

As we have already discussed, calculating TAM, SAM, and SOM helps understand the market size and share. This makes it especially important for companies, especially start-ups, to know these values concerning their ventures. The quick formulas for calculating TAM, SAM, and SOM make this task easy.

Let us discuss these calculations

Calculating TAM

To calculate the TAM for your offering, it is advised that you start with a bottom-up analysis of the industry. Once this is done, multiply the total potential customers with the average annual revenue per customer.

Here is the formula –

Total number of accounts in the market * Annual contract value

The total number of accounts in the market can be gained through market research.

Annual contract value can be derived from the company’s customer data.

Calculating SAM

To calculate SAM, you should list out the TAM from a specific target market. The next step is to multiply the number by the average annual revenue generated by each customer.

Here is the formula –

TAM from specific target market * Annual contract value

Calculating SOM

To calculate SOM, you will have to divide your previous year’s SAM and multiply it by this year’s SAM.

Here is the formula –

Previous year’s Market Share * The current year’s SAM

Examples of TAM, SAM, and SOM

Take the case of a start-up operating in the cloud services industry. To calculate the TAM of this company, start by counting the total number of businesses paying for cloud services (in the world). Imagine that there are 50 million businesses.

The next step is to find the average spending/customer in the market. If that is found to be about $2,000/year.

Now, you will have to multiply the two numbers to get your TAM, i.e., (50 million * $2,000)

To calculate the SAM, let us narrow down the target market – let us say that the start-up specializes in providing cloud services to companies in the Finance industry.

So now, you will have to identify the number of potential customers in this particular target segment. Say the number is 20 million of the 50 million counted for the TAM.

Now, let us consider that the average annual spend/customer is $3000/year for 20 million businesses.

Then the SAM = 20 million * $3000

Now, to calculate the SOM, you will have to list out the previous year’s sales of your start-up. Let us assume that the start-up generated $30 million in sales during the previous year. The next step will be to multiply it by the SAM of the current year.

The Impact of Industry and Market Trends on TAM SAM SOM 

Industry and market trends can have a significant impact on TAM, SAM, and SOM. These trends shape the overall market conditions and customer behavior, influencing the size of the market opportunity and a company’s ability to target and capture market share. Here’s how industry and market trends can affect TAM, SAM, and SOM: 

1. Market Growth and Saturation: Industry growth trends directly impact the TAM. A growing market will likely result in an expanding TAM, providing more significant opportunities for businesses. On the other hand, a saturated or declining market may limit the TAM, making it challenging to find new growth opportunities. 

2. Emerging Market Segments: New trends and emerging market segments can affect the SAM. As consumer preferences change, new niche markets may arise, leading to the identification of previously untapped segments within the SAM. Companies that can adapt their offerings to cater to these emerging segments can increase their potential SOM. 

3. Technological Advancements: Technological advancements can create new market opportunities and disrupt existing ones. Innovations can expand the TAM by introducing products or services that were not previously available. They can also shift the SAM by enabling companies to reach previously inaccessible markets or to serve customers in more efficient ways. 

4. Changing Customer Preferences: Customer preferences and behaviors play a significant role in determining the SAM and SOM. Shifts in consumer preferences can open up new target segments within the SAM, leading to an increase in the SOM for businesses that can meet these changing demands effectively. 

5. Competitive Landscape: Changes in the competitive landscape can directly impact SOM. If new competitors enter the market or existing ones strengthen their market presence, a company’s potential SOM may be reduced. Alternatively, if competitors exit the market or lose market share, it can create opportunities for other businesses to increase their SOM. 

6. Regulatory and Legal Changes: Changes in regulations and laws can affect market dynamics and impact TAM, SAM, and SOM. For example, new regulations may create barriers to entry, limiting the SAM for some businesses. On the other hand, regulatory changes that favor certain products or services can expand the TAM and increase the SOM for companies operating in those sectors. 

7. Economic Factors: Economic trends, such as inflation, interest rates, and GDP growth, can influence consumer spending and overall market demand. Economic downturns may shrink the TAM as consumers tighten their spending, while periods of economic prosperity may lead to an expanded TAM. 

8. Global Market Trends: For businesses operating in a global context, international market trends can significantly impact TAM, SAM, and SOM. Factors like currency exchange rates, geopolitical events, and international trade policies can affect the size of the addressable markets and influence a company’s potential SOM in various regions. 

Wrapping it up

To wrap things up, we re-iterate that “market analysis is essential for both existing companies as well as start-ups.” For start-ups seeking funding, investors use the TAM, SAM, and SOM as key metrics for evaluating market size and revenue potential. Such standardization lowers the possibility of misunderstanding, gives investors a statistical baseline from which to assess a business opportunity, and articulates the potential for short-, mid-, and long-term growth.

The SOM demonstrates the short-term potential of the company. The SAM/SOM ratio helps define the market share that the business aims for. Likewise, the TAM demonstrates the highest market potential.

We have defined all three, i.e., TAM, SAM, and SOM, and we have also provided the formula to calculate the market size. So, start-ups… get to calculate your market size. 

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