Starting a latest company is exciting. So is gauging an industry’s profit potential or forecasting a revenue goal for your online business. But as you begin calculating, you could remember to root these figures in point of fact.
In the event you don’t, you possibly can enter a market that doesn’t have a big enough market size to persuade investors to back you, or you possibly can set an unrealistic revenue goal for your online business and burn your employees out.
To assist you to avoid these issues, we’ve put together a guide that’ll teach you exactly how one can calculate your industry’s total addressable market, serviceable addressable market, and share of market.
TAM SAM SOM
TAM, SAM, and SOM are acronyms for 3 metrics to explain the market your organization operates in — Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market.
These metrics are key components of a marketing strategy, particularly as you craft your marketing and sales strategy, set realistic revenue goals, and decide to enter the markets which might be value your time and resources.
TAM SAM SOM Definitions
TAM (Total Addressable Market)
Total addressable market or TAM refers to the full market demand for a services or products. It’s the utmost amount of revenue a business can generate by selling its services or products in a particular market.
Total addressable market is most useful for businesses to objectively estimate a particular market’s potential for growth. This data also helps corporations work out product market fit.
SAM (Serviceable Addressable Market)
Attributable to the constraints of your online business model (akin to specialization or geographic limitations), you’ll have a tricky time servicing your total addressable market.
Serviceable addressable market is most useful for businesses to objectively estimate the a part of the market they’ll acquire to work out their targets.
SOM (Serviceable Obtainable Market)
Unless you are a monopoly, you almost certainly can’t capture 100% of your serviceable addressable market. Even in the event you only have one competitor, it might still be extremely difficult to persuade a whole market to only buy your services or products. That’s why it’s crucial to measure your serviceable obtainable market to estimate how many purchasers would realistically profit from buying your services or products.
Serviceable Obtainable market is most useful for businesses to find out short-term growth targets. It will possibly also help with competitive awareness and strategizing.
Why TAM SAM SOM Matters
TAM, SAM, and SOM are essential to business strategy and growth planning. It’s because these metrics show how much opportunity a specific market holds at every stage of business growth.
TAM SAM SOM can be useful since it’s a straightforward and succinct approach to present the worth of an idea. This data gives teams an idea of the audience and income opportunities for a market or area of interest.
These metrics can even help businesses share key insights with investors in the event that they are searching for funding. The method makes it easier to make decisions that impact growth.
For instance, say you haven’t got a transparent picture of the fitting segment in your SAM. This might make your serviceable addressable market too big, which might then impact your SOM.
TAM SAM SOM Template
Now that you understand what each of those acronyms is and what they’re used for, let’s get into the nitty-gritty of how one can calculate TAM, SOM, and SAM. Doing so requires advanced market research ahead of time, but listed below are the formulas when you’re in a position to get those figures:
Total Addressable Market (TAM) Calculation
One of the best approach to calculate total addressable market is by running a bottom-up evaluation of an industry. A bottom-up evaluation involves counting the full number of consumers in a market and multiplying that number by the common annual revenue of every customer on this market.
Serviceable Addressable Market (SAM) Calculation
To calculate your serviceable addressable market, count up all of the potential customers that will be fit for your online business and multiply that number by the common annual revenue of some of these customers in your market.
Serviceable Obtainable Market (SOM) Calculation
Divide your revenue from last 12 months by your industry’s serviceable addressable market from last 12 months. This percentage is your market share from last 12 months. Then, multiply your market share from last 12 months by your industry’s serviceable addressable market from this 12 months.
Right Size Your Market Opportunities with TAM SAM SOM
As you start, consider that these figures will largely be estimates to tell your strategy. The more market research you do and the more historical data you construct up, the more precise your planning might be.
Don’t just work out the opportunities in your market. Use your research to determine who you need to goal and the way you propose to interact them together with your products. Then, use these templates to make your plans clear.
Editor’s note: This post was originally published in March 2019 and has been updated for comprehensiveness.
