TAM, SAM, and SOM are critical components in the creation of a successful business plan. Understanding these three metrics will help start-ups better understand their target market and create a roadmap for growth.
TAM (Total Addressable Market) refers to the total market demand for a product or service. It represents the potential revenue that a company could generate if it captured 100% of the market. This metric provides a high-level overview of the size of the market opportunity and helps companies determine whether there is enough demand to justify investment in a new product or service.
SAM (Serviceable Addressable Market) refers to the portion of the TAM that a company can realistically serve. It considers factors such as geographic reach, resources, and market competition, to estimate the market share a company can realistically capture. This metric is useful in determining the potential revenue that a company can generate and helps to focus on the most promising segments of the market.
SOM (Share of Market) refers to the portion of the SAM that a company can realistically capture. It is a measure of market share and provides a more accurate estimate of the potential revenue a company can generate. This metric is useful in identifying key target segments and creating a sales and marketing strategy that can effectively reach these segments.
TAM, SAM, and SOM are important metrics for start-ups to consider in their business planning. By understanding these metrics, companies can determine the size of the market opportunity, target the most promising market segments, and create a roadmap for growth. Utilizing these metrics can help startups make informed decisions, minimize risks, and increase their chances of success.
Calculating Total Addressable Market (TAM), Served Available Market (SAM), and Share of Market (SOM) for Your Business: An Example
To calculate Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Share of Market (SOM) for a particular business, follow these steps:
- Identify the market size: This involves determining the size of the overall market for your product or service. This will give you the TAM.
- Determine the target market: Next, identify your target market and determine the size of this segment. This will give you the SAM.
- Determine the share of the target market: Calculate the market share that you aim to capture within your target market. This is your SOM.
- Use market research to validate the market size: Use secondary research sources such as market reports, industry publications, and online databases to validate the market size and growth rate.
- Calculate the market size and growth rate: Use the data gathered from market research to calculate the size and growth rate of the market.
- Determine the revenue potential: Based on the market size, growth rate, and your SOM, determine the revenue potential for your business.
- Refine and adjust the estimates: Finally, refine and adjust the estimates as needed based on the results of the market research and your own experience.
It’s important to keep in mind that these calculations are estimates and should be regularly updated as your business grows and the market evolves.
TAM, SAM & SOM EXAMPLE
TAM, SAM, and SOM are three important measures of market size that help companies determine their potential revenue and growth. Here is an example to help illustrate how to calculate these measures:
Suppose a company provides IoT based solutions for the smart homes market.
- Total Available Market (TAM): The total market size of the smart home industry including all potential customers and users of the product or service. This is the total size of the market, regardless of the company’s ability to serve it.
TAM = Total addressable market of smart homes
- Serviceable Available Market (SAM): The portion of the TAM that a company can realistically target and serve with their product or service. This includes geographic, demographic, and other constraints that may affect the company’s ability to reach and serve customers.
SAM = TAM * (Company’s target market share)
- Serviceable Obtainable Market (SOM): The portion of the SAM that the company can realistically capture with their current resources and capabilities. This includes the company’s ability to effectively compete for customers in their target market.
SOM = SAM * (Company’s current market share)
By calculating the TAM, SAM, and SOM, the company can get a better understanding of the potential size of their market and the opportunities for growth. This information can be used to set realistic revenue and growth targets and to determine the resources needed to capture the SOM and grow the business.
