Market Sizing with TAM, SAM, SOM

If you're a business owner or a marketer, you've probably heard of market sizing. But have you heard of TAM, SAM, and SOM?

No, these aren't the names of three friendly llamas, but rather an essential framework for estimating the potential market size of a product or service.

But don't worry, you don't need a degree in mathematics to understand it! In this blog, we'll break down what TAM, SAM, and SOM are, why they matter, and how to calculate them - without getting lost in a herd of llamas!

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, assuming there are no limitations on factors such as geography, price, or distribution.
SAM: Serviceable Available Market. This is the part 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 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 is the total market demand, SAM is the portion of the market that a business can realistically target, and SOM is the portion of the SAM that a business can realistically capture.

Why is TAM, SAM, SOM important?

TAM, SAM, SOM is important because it helps businesses to:

Understand the market potential: By estimating the total market demand (TAM), a business can understand the potential size of the market and the opportunity that exists for their product or service.
Identify 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.
Determine market share: By estimating the serviceable obtainable market (SOM), a business can determine the percentage of the SAM they can realistically capture. This helps them to set achievable goals and develop realistic sales and marketing strategies.
Make 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.

In summary, TAM, SAM, SOM analysis helps businesses to make data-driven decisions, understand their market potential, and develop effective strategies to reach their target audience.

How businesses can use a TAM, SAM, and SOM analysis to make strategic decisions

TAM, SAM, and SOM analysis is a great way to make strategic business decisions.

Identify 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.
Allocate resources effectively: 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.
Develop effective marketing and sales strategies: 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.
Evaluate market potential: 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.

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?

Importance of TAM, SAM, and SOM for Marketing

TAM, SAM, and SOM are important market-sizing concepts that can help businesses identify new market opportunities, target specific customer segments, and optimize their marketing efforts and resources to achieve their business goals.

Market sizing using TAM SAM SOM

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.

How to use TAM SAM SOM for market sizing

A TAM, SAM, and SOM analysis is a useful tool 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.
Calculate the TAM: Calculate the Total Addressable Market (TAM) by estimating the total demand for the product or service in the entire market. This involves identifying all potential customers, regardless of whether they are currently purchasing the product or service.
Calculate the SAM: Calculate the Serviceable Available Market (SAM) by estimating the portion of the TAM that your business can realistically serve, given your resources and capabilities.
Calculate the SOM: Calculate the Serviceable Obtainable Market (SOM) by estimating the portion of the SAM that your business can realistically capture, given your current market share and competition.
Analyze the data: Analyze the data to identify market trends, potential growth opportunities, and areas for improvement.
Develop strategies: Use the data to develop strategies that can help you increase your market share and capture a larger portion of the SOM. (Here’s where we can help! Let’s chat.)

Now… on to the math!

How to calculate TAM

The calculation for TAM (Total Addressable Market) is:

TAM = (Total number of potential customers) x (Average annual revenue per customer)

To calculate TAM, you need to estimate the total number of potential customers in your target market and the average annual revenue per customer. This provides an estimate of the total revenue opportunity that exists in the market for your product or service.

Example of TAM calculation:

For example, let's say you are launching a new e-commerce platform for handmade goods. To calculate the TAM for this market, you would estimate the total number of potential customers who are interested in buying handmade goods online and the average annual revenue per customer.

If you estimate there are 10 million potential customers in the market and the average annual revenue per customer is $500, then the TAM would be:

TAM = 10,000,000 x $500

TAM = $5,000,000,000

This would mean that the total addressable market for your e-commerce platform for handmade goods is $5 billion.

However, it's important to keep in mind that this is just an estimate and actual market size and revenue potential may vary based on a variety of factors such as competition, market trends, and consumer behavior.

How to calculate SAM

The calculation for SAM (Serviceable Available Market) is:

SAM = (Total number of potential customers) x (Percentage of potential customers that can be realistically served) x (Average annual revenue per customer)

This provides an estimate of the revenue opportunity that your business can realistically capture in the market.

Example of SAM calculation:

For example, let's say you are launching a new software product for small businesses. If you estimate there are 1 million potential customers in the market, and your business can realistically serve 10% of them, and the average annual revenue per customer is $1,000, then the SAM would be:

SAM = 1,000,000 x 0.1 x $1,000

SAM = $100,000,000

This would mean that the estimated serviceable available market for your software product for small businesses is $100 million. SAM calculations can help businesses to identify the most promising market opportunities and allocate their resources more effectively to maximize their potential for growth and profitability.

How to calculate SOM

The calculation for SOM (Serviceable Obtainable Market) is:

SOM = (Total number of potential customers) x (Percentage of potential customers that can be realistically served by your business) x (Percentage of the market that your business can realistically capture) x (Average annual revenue per customer)

Example fo a SOM calculation:

For example, let's say you are launching a new food delivery service in a city with a population of 1 million people. If you estimate that your business can realistically serve 20% of the potential customers, can realistically capture 5% of the market, and the average annual revenue per customer is $1,000, then the SOM would be:

SOM = 1,000,000 x 0.2 x 0.05 x $1,000

SOM = $10,000,000

Differences Between TAM, SAM, and SOM

TAM, SAM, and SOM are important market sizing metrics that help businesses understand the potential size of their target market. Here are the differences between TAM, SAM, and SOM:

Total Addressable Market (TAM): TAM represents the total market demand for a particular product or service if there were no limitations on market share or resources. TAM takes into account all potential customers and scenarios, regardless of whether or not a business can realistically capture them.
Serviceable Available Market (SAM): SAM represents the portion of the TAM that a business can realistically target and serve based on its resources, capabilities, and market strategy.
Serviceable Obtainable Market (SOM): SOM takes into account the specific strengths and weaknesses of a business, as well as its marketing and sales strategies.

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.

Conclusion

So, there you have it!

TAM, SAM, SOM is a simple, yet powerful framework that helps businesses estimate the potential market size of a product or service.

While it may not involve any friendly llamas, it does involve some math. However, with the calculations and examples we've provided, you should be able to estimate your TAM, SAM, and SOM with ease.

By understanding your market potential and identifying target markets, you can develop informed business strategies that lead to growth and success. So, grab a calculator and get started on your TAM, SAM, SOM analysis today! …Or contact Seer’s Analytics & Insights team.