TAM (Total Addressable Market):
TAM is an abbreviation for “Total Addressable Market.” It represents the total potential market size for a certain product or service within a specific sector or geographical area. TAM is the total demand for a product or service if it can meet the needs of every possible consumer without any constraints or competition.
TAM’s primary features are as follows:
TAM covers all possible customers or organizations that could benefit from or have a need for the product or service whether they are currently in the market or actively looking for it.
Theoretical Upper Limit:
TAM indicates the maximum revenue or sales opportunity for a company if it has to obtain 100% of the market share.
Businesses use TAM as a strategic tool to examine the whole market opportunity. It assists them in determining whether it is worthwhile to enter or invest resources in a specific market.
TAM is an important component of market research and analysis. It gives a starting point for businesses to estimate the size of their prospective client base and the income they could make in an ideal scenario.
While TAM reflects the highest potential, organizations rarely capture the whole market. Other considerations include competition, market dynamics and resource constraints.
SAM (Serviceable Addressable Market):
SAM is an abbreviation for “Serviceable Addressable Market.” It is a subset of the Total Addressable Market (TAM) and indicates the fraction of the market that a company can realistically target and serve considering its resources, capabilities and limits. SAM, in essence, is a more precise and concentrated perspective of the market opportunity than TAM.
SAM’s primary features include:
SAM involves dividing the overall market into specific groups or sectors that correspond to a company’s strengths and resources.
SAM considers the actual limitations that a business encounters. This consists of aspects such as the company’s manufacturing capacity, distribution capabilities, marketing budget and sales resources.
By identifying the SAM, a company may successfully focus its efforts and resources on reaching and serving a certain market segment. It aids in the development of marketing and sales strategies that are tailored to the demands and preferences of the defined targeted audience.
SAM provides a more precise assessment of a company’s potential client base and income possibilities. It limits the market opportunity to a manageable and achievable level.
SAM assists firms in efficiently allocating their resources. It aids in making decisions on where to invest in marketing, sales, product development and customer support in order to effectively capture the designated market segment.
SOM (Serviceable Obtainable Market):
SOM is an abbreviation for “Serviceable Obtainable Market.” It is both a subset of the Total Addressable Market (TAM) and a subset of the Serviceable Addressable Market (SAM). SOM represents the specific market share or percentage of SAM that a company may realistically capture during a given time period, taking into account competition, market dynamics and other external variables.
SOM’s key qualities include:
Realistic Market Share:
SOM describes a practical and attainable portion of SAM that a company wants to achieve. Unlike TAM which depicts the potential of the entire market, SOM takes into account the competitive environment and market conditions to achieve a more realistic goal.
SOM frequently contains a time element that specifies the market share that a firm plans to obtain over a specific time period such as one year, three years or five years.
Consideration of Competitors:
SOM recognizes the presence of competitors and their impact on the market. It takes into account the degree to which a company can compete and differentiate itself in the marketplace in order to obtain the designated market share.
Setting a particular SOM target allows organizations to make sensible decisions about resource allocation, marketing strategy, product development and sales efforts required to meet market share targets.
Measurable and Achievable:
SOM is a practical and measurable aim that assists organizations in evaluating their market progress and success. It is used to determine whether the organization is accomplishing its objectives or not.
Total Addressable Market (TAM) Formula and Calculation:
The Total Addressable Market (TAM) is determined using the following simple formula:
TAM = (Total Number of Potential Customers) x (Average Revenue per Customer)
This formula can be broken down as follows:
Total Number of Potential Customers:
This is the total number of people or organizations who potentially benefit from your product or service. When calculating, consider parameters such as the overall population in your market of interest, the number of enterprises in your industry or any other relevant factors.
Average Revenue per Customer:
This is the amount of money you anticipate earning from each customer over a given time period. It is important to use a reasonable and data-driven estimate for this figure.
Once you’ve determined these two figures, multiply them to get your TAM.
Here’s an example:
Suppose you’re launching a new mobile app and your target market is the whole adult population of a 50-million-person country. You predict that each user will produce $20 in income per year via in-app purchases and subscriptions. Your TAM is as follows:
TAM = (50,000,000 potential consumers) x (average revenue per client of $20) = $1,000,000,000 (1 billion dollars)
In this case, your Total Addressable Market (TAM) is $1 billion. This indicates the maximum revenue chance if you were to gain 100% of the market share in the population you are targeting.
It is vital to note that TAM gives a theoretical upper limit and capturing the entire market is extremely difficult due to competition, market dynamics and other considerations.
Serviceable Addressable Market (SAM) Formula and Calculation:
Given its resources, capabilities, and limits, the Serviceable Addressable Market (SAM) is the percentage of the Total Addressable Market (TAM) that your company can realistically target and serve. You can use the following formula to calculate SAM:
SAM = (Total Number of Potential Customers or Organizations) x (Percentage of Market You Can Serve)
Here’s an explanation of calculating SAM:
Total Number of Potential Customers or Organizations:
As in the TAM calculation, it’s the same as the total number of potential customers or organizations. It reflects the complete pool of possible customers or organizations within your chosen market segment who could benefit from your product or service.
Percentage of the Market You Can Easily Capture:
This percentage shows the fraction of the market you can efficiently reach, serve and capture. It considers aspects such as your manufacturing capacity, distribution capabilities, marketing budget, sales resources and other operational restrictions.
Once you’ve determined these two values, you can multiply them to calculate your SAM.
Suppose you’re a software company offering specialized accounting software for small businesses in a specific region. The total number of small businesses in that region is 10,000 but you estimate that you can realistically serve and reach 20% of them due to limited marketing and sales resources.
SAM = (10,000 potential small businesses) x (20% of them) = 2000 small businesses.
Your Serviceable Addressable Market (SAM) in this case would be 2,000 small companies. Given your operational limits and resources, this is the fraction of the market you can effectively target and service.
Serviceable Obtainable Market (SOM) Formula and Calculation:
The Serviceable Obtainable Market (SOM) is the particular market share or percentage of the Serviceable Addressable Market (SAM) that your company can realistically capture over a certain time period, taking into account competition, market dynamics and other external variables. SOM can be calculated using the following formula:
SOM = (SAM) x (Expected Market Share Percentage)
Here’s a step-by-step guide to calculate SOM:
SAM (Serviceable Addressable Market):
This is the SAM value you determined before. It shows the fraction of the Total Addressable Market (TAM) that you can target and serve realistically.
Expected Market Share Percentage:
This is the percentage of SAM that you hope to capture in a given time frame, taking into account competing variables and market conditions.
After you’ve determined these two values, multiply them to get your SOM.
Here’s an example:
Suppose you are the owner of a new coffee shop in an area with a SAM of 2,000 potential consumers (depending on your resources and capability). You anticipate that after completing market research and considering local competition, you can take 10% of the SAM within the first year of service.
SOM = (SAM of 2,000 prospective consumers) x (estimated market share of 10%) = 200 customers
In this case, your Serviceable Obtainable Market (SOM) would be 200 consumers during the first year. Based on your resources and market conditions, this is the specific market share you are seeking to capture.
Where can I find TAM SAM and SOM?
TAM, SAM and SOM data can be found in market research reports, industry publications and through your own market research. These market segmentation figures are frequently provided by online databases, government statistics and industry groups.