As a marketer, I frequently find myself hunched over my desk, calculator in hand, tackling some fundamental math. You might wonder what exactly I’m crunching numbers for.
The answer often lies in determining the Total Addressable Market (TAM) for a particular topic to assess whether it’s worthwhile to incorporate it into our marketing and sales efforts.
Beyond marketing, calculating Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) proves beneficial for various aspects of business.
Entrepreneurs can evaluate the feasibility of their ventures, while product teams can confirm the market potential success of new offerings.
Neglecting these metrics can lead to significant pitfalls. You might venture into a market that’s too small to attract investor interest or set overly ambitious revenue targets that could overwhelm your team.
To help you navigate these challenges, I’ve created a comprehensive guide that walks you through calculating your industry’s TAM, SAM, and SOM.
What is TAM SAM SOM?
TAM SAM SOM are abbreviations for three critical metrics that define the scope of the market your business operates within:
TAM (Total Addressable Market)
SAM (Serviceable Addressable Market)
SOM (Serviceable Obtainable Market)
These metrics are integral to crafting a robust business plan. They assist in developing marketing and sales strategies, setting achievable revenue targets, and selecting markets that justify your investment of time and resources.
Additionally, they help businesses allocate resources more effectively to ensure alignment with strategic goals.
Before diving into how to apply these metrics to your business, let’s clarify what each term means and how they interrelate.
Definitions of TAM, SAM, and SOM
If you’re new to the concepts of TAM SAM SOM, they might initially seem like a jumble of confusing acronyms.
However, they are simply overlapping metrics that help refine your business strategy, set attainable goals, and comprehend the potential revenue and operational impacts of various business decisions. Let’s break each one down:
1. TAM (Total Addressable Market)
Definition: TAM represents the total market demand for a product or service. It signifies the maximum revenue a business can generate by selling its offerings within a specific market.
Calculating TAM might seem daunting, but it’s a crucial step. Essentially, TAM helps businesses objectively gauge a market’s growth potential and assess product-market fit.
2. SAM (Serviceable Addressable Market)
Definition: SAM is the portion of the TAM that your business can realistically target, considering factors like your business model, specialization, and geographical constraints.
SAM allows businesses to identify the achievable segment of the market, making it easier to estimate average revenue and set audience targets.
3. SOM (Serviceable Obtainable Market)
Definition: SOM is the subset of SAM that your business can realistically capture. Unlike monopolies, most businesses cannot dominate their entire serviceable market due to competition.
Calculating SOM (serviceable obtainable market) helps businesses set short-term growth targets and develop strategies to increase market share within a competitive landscape.
The importance of TAM SOM SAM
TAM SAM SOM is vital for shaping business strategy and planning growth. These metrics provide insight into the opportunities available at each stage of business development.
Moreover, they offer a concise way to communicate the value of your business idea, outline your target audience, and highlight revenue opportunities within a specific market or niche.
This information is particularly valuable when presenting to investors, as it underscores the market potential and viability of your business.
For instance, lacking a clear understanding of your SAM could result in an overly ambitious serviceable market, subsequently affecting your SOM calculations. Lori Highby from Keystone Click emphasizes the importance of these metrics in defining a niche.
By utilizing data from reputable sources like Gartner, Forrester, and various government and trade associations, businesses can accurately calculate TAM SAM SOM to identify the most viable niches.
Applying TAM, SAM, and SOM to your business
Understanding TAM SAM SOM is one thing, but applying these calculations to your business can be challenging. Here’s a step-by-step guide to help you navigate the process:
Step 1: Define your market
Begin by clearly identifying your market and what you’re offering—whether it’s a service, a specific product, or a category of products. To do this effectively, consider aspects such as:
Geographic locations
Demographic factors (age, gender, etc.)
Customer characteristics
The problem your product or service solves
Step 2: Calculate TAM
Engage in thorough market research to determine the total number of potential customers and the revenue each customer could generate if they purchased your product or service.
For example, if targeting women aged 25 to 65, determine how many women fall into this category and calculate the potential revenue if each of them buys your product.
Step 3: Determine SAM
Narrow down your TAM (Total Addressable Market) to the portion you can realistically target. For instance, if you run a high-end women’s professional clothing store in the U.S., identify how many women within your target age range reside there and estimate their annual spending on apparel.
Step 4: Assess SOM
Estimate the portion of your SAM that you can realistically capture. Consider factors like income levels and employment status to refine your target market further.
Analyze the competitive landscape to gauge how much market share you can attain.
Step 5: Identify opportunities and challenges
With your TAM SAM SOM calculated, delve into the data to strategize effectively. Ask questions like:
What is the current market landscape?
What are your competitors doing well or poorly?
Are there underserved market segments?
Use these insights to develop strategies that leverage your strengths and address market gaps.
TAM, SAM, and SOM calculation templates
Now that you understand what TAM SAM SOM represents, let’s explore how to calculate each metric While advanced market research is necessary to obtain accurate figures, here are the basic formulas once you have the essential industry data:
1. Total Addressable Market (TAM) Calculation
A bottom-up analysis is the most effective way to calculate TAM:
Determine the total number of potential customers in your market.
Identify the average annual revenue per customer.
Multiply these two numbers to get your TAM.
Uses of TAM:
Launching a new business or product
Reviewing and adjusting market strategies
Revising business plans
Identifying opportunities to expand market share
Example:
For a high-end women’s professional apparel brand, if the global women’s apparel market was valued at $1.002 trillion in 2023 and is expected to grow by 3.3% annually, the TAM for 2024 would be approximately $1.035 trillion.
Identify all potential customers that fit your business criteria.
Determine the average revenue annually from these customers.
Multiply these figures to obtain your SAM.
Uses of SAM:
Planning marketing and sales strategies
Conducting market research and competitive analysis
Assessing product viability
Example:
Using the same apparel brand example, if the U.S. women’s apparel market is projected to be $191.4 billion in 2024, and there are 86 million women aged 25-65 spending an average of $2,000 annually on apparel, the SAM would be $172 billion.
Divide your previous year’s revenue by the previous year’s SAM to find your market share.
Apply this market share percentage to the current year’s SAM to estimate your new SOM.
Uses of SOM:
Budgeting for business operations and marketing
Setting achievable growth plans
Developing targeted marketing and sales strategies
Example:
Continuing with our apparel brand, if last year’s revenue was $500 million and the 2023 SAM was $172 billion, the market share would be approximately 0.003%.
Applying this to the 2024 SAM of $191.4 billion results in a SOM of $574.2 million, indicating a potential 15% growth from the previous year. However, it’s crucial to ensure these numbers are realistic by thoroughly analyzing market conditions.
Tools and resources for market sizing
Various tools and resources are available to help you estimate your industry’s TAM, SAM, and SOM. Some of these include:
1) Industry reports and market research data:
These resources offer critical insights into factors like market size, growth patterns, and the competitive landscape of your industry.
For instance, reports from sources like IBISWorld deliver data on market size and expected growth rates, helping businesses understand the dynamics of their sector.
2) Public financial reports:
Public financial reports from publicly traded companies offer valuable insights into market size and competitor performance. A good starting point is reviewing a company’s 10-K filing, which contains detailed information about its financial health and market positioning.
3) Primary research:
Conducting customer surveys, interviews, and other primary research methods can help you gather critical data about your target market and potential market size.
4) Market research tools:
There are numerous market research tools available, such as SimilarWeb, which can provide on-demand access to dynamic market insights and help you estimate TAM SAM SOM for your industry.
Right-sizing market opportunities with TAM SAM SOM
When I first delved into marketing, the terms TAM SAM SOM seemed like overwhelming jargon. It was easy to overlook their importance. Today, I recognize the critical role these metrics play and regularly perform these calculations myself.
As you begin this process, remember that these figures are estimates meant to guide your strategy. The more comprehensive your market research and historical data, the more accurate your planning will become.
Don’t just identify market opportunities—use your research to determine your target audience and devise strategies to engage them effectively with your products. Utilize these templates to clarify and structure your plans.
Riyanshi is an enthusiastic content creator and SEO strategist at Salesmate who curates information on marketing, sales, and customer experience. She loves to explore new places and meet new people when she is not working.
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As a marketer, I frequently find myself hunched over my desk, calculator in hand, tackling some fundamental math. You might wonder what exactly I’m crunching numbers for.
The answer often lies in determining the Total Addressable Market (TAM) for a particular topic to assess whether it’s worthwhile to incorporate it into our marketing and sales efforts.
Beyond marketing, calculating Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) proves beneficial for various aspects of business.
Entrepreneurs can evaluate the feasibility of their ventures, while product teams can confirm the market potential success of new offerings.
Neglecting these metrics can lead to significant pitfalls. You might venture into a market that’s too small to attract investor interest or set overly ambitious revenue targets that could overwhelm your team.
To help you navigate these challenges, I’ve created a comprehensive guide that walks you through calculating your industry’s TAM, SAM, and SOM.
What is TAM SAM SOM?
TAM SAM SOM are abbreviations for three critical metrics that define the scope of the market your business operates within:
These metrics are integral to crafting a robust business plan. They assist in developing marketing and sales strategies, setting achievable revenue targets, and selecting markets that justify your investment of time and resources.
Additionally, they help businesses allocate resources more effectively to ensure alignment with strategic goals.
Before diving into how to apply these metrics to your business, let’s clarify what each term means and how they interrelate.
Definitions of TAM, SAM, and SOM
If you’re new to the concepts of TAM SAM SOM, they might initially seem like a jumble of confusing acronyms.
However, they are simply overlapping metrics that help refine your business strategy, set attainable goals, and comprehend the potential revenue and operational impacts of various business decisions. Let’s break each one down:
1. TAM (Total Addressable Market)
Definition: TAM represents the total market demand for a product or service. It signifies the maximum revenue a business can generate by selling its offerings within a specific market.
Calculating TAM might seem daunting, but it’s a crucial step. Essentially, TAM helps businesses objectively gauge a market’s growth potential and assess product-market fit.
2. SAM (Serviceable Addressable Market)
Definition: SAM is the portion of the TAM that your business can realistically target, considering factors like your business model, specialization, and geographical constraints.
SAM allows businesses to identify the achievable segment of the market, making it easier to estimate average revenue and set audience targets.
3. SOM (Serviceable Obtainable Market)
Definition: SOM is the subset of SAM that your business can realistically capture. Unlike monopolies, most businesses cannot dominate their entire serviceable market due to competition.
Calculating SOM (serviceable obtainable market) helps businesses set short-term growth targets and develop strategies to increase market share within a competitive landscape.
The importance of TAM SOM SAM
TAM SAM SOM is vital for shaping business strategy and planning growth. These metrics provide insight into the opportunities available at each stage of business development.
Moreover, they offer a concise way to communicate the value of your business idea, outline your target audience, and highlight revenue opportunities within a specific market or niche.
This information is particularly valuable when presenting to investors, as it underscores the market potential and viability of your business.
For instance, lacking a clear understanding of your SAM could result in an overly ambitious serviceable market, subsequently affecting your SOM calculations. Lori Highby from Keystone Click emphasizes the importance of these metrics in defining a niche.
By utilizing data from reputable sources like Gartner, Forrester, and various government and trade associations, businesses can accurately calculate TAM SAM SOM to identify the most viable niches.
Applying TAM, SAM, and SOM to your business
Understanding TAM SAM SOM is one thing, but applying these calculations to your business can be challenging. Here’s a step-by-step guide to help you navigate the process:
Step 1: Define your market
Begin by clearly identifying your market and what you’re offering—whether it’s a service, a specific product, or a category of products. To do this effectively, consider aspects such as:
Step 2: Calculate TAM
Engage in thorough market research to determine the total number of potential customers and the revenue each customer could generate if they purchased your product or service.
For example, if targeting women aged 25 to 65, determine how many women fall into this category and calculate the potential revenue if each of them buys your product.
Step 3: Determine SAM
Narrow down your TAM (Total Addressable Market) to the portion you can realistically target. For instance, if you run a high-end women’s professional clothing store in the U.S., identify how many women within your target age range reside there and estimate their annual spending on apparel.
Step 4: Assess SOM
Estimate the portion of your SAM that you can realistically capture. Consider factors like income levels and employment status to refine your target market further.
Analyze the competitive landscape to gauge how much market share you can attain.
Step 5: Identify opportunities and challenges
With your TAM SAM SOM calculated, delve into the data to strategize effectively. Ask questions like:
Use these insights to develop strategies that leverage your strengths and address market gaps.
TAM, SAM, and SOM calculation templates
Now that you understand what TAM SAM SOM represents, let’s explore how to calculate each metric While advanced market research is necessary to obtain accurate figures, here are the basic formulas once you have the essential industry data:
1. Total Addressable Market (TAM) Calculation
A bottom-up analysis is the most effective way to calculate TAM:
Uses of TAM:
Example:
For a high-end women’s professional apparel brand, if the global women’s apparel market was valued at $1.002 trillion in 2023 and is expected to grow by 3.3% annually, the TAM for 2024 would be approximately $1.035 trillion.
2. Serviceable Addressable Market (SAM) Calculation
To calculate SAM:
Uses of SAM:
Example:
Using the same apparel brand example, if the U.S. women’s apparel market is projected to be $191.4 billion in 2024, and there are 86 million women aged 25-65 spending an average of $2,000 annually on apparel, the SAM would be $172 billion.
3. Serviceable Obtainable Market (SOM) Calculation
To calculate SOM:
Uses of SOM:
Example:
Continuing with our apparel brand, if last year’s revenue was $500 million and the 2023 SAM was $172 billion, the market share would be approximately 0.003%.
Applying this to the 2024 SAM of $191.4 billion results in a SOM of $574.2 million, indicating a potential 15% growth from the previous year. However, it’s crucial to ensure these numbers are realistic by thoroughly analyzing market conditions.
Tools and resources for market sizing
Various tools and resources are available to help you estimate your industry’s TAM, SAM, and SOM. Some of these include:
1) Industry reports and market research data:
These resources offer critical insights into factors like market size, growth patterns, and the competitive landscape of your industry.
For instance, reports from sources like IBISWorld deliver data on market size and expected growth rates, helping businesses understand the dynamics of their sector.
2) Public financial reports:
Public financial reports from publicly traded companies offer valuable insights into market size and competitor performance. A good starting point is reviewing a company’s 10-K filing, which contains detailed information about its financial health and market positioning.
3) Primary research:
Conducting customer surveys, interviews, and other primary research methods can help you gather critical data about your target market and potential market size.
4) Market research tools:
There are numerous market research tools available, such as SimilarWeb, which can provide on-demand access to dynamic market insights and help you estimate TAM SAM SOM for your industry.
Right-sizing market opportunities with TAM SAM SOM
When I first delved into marketing, the terms TAM SAM SOM seemed like overwhelming jargon. It was easy to overlook their importance. Today, I recognize the critical role these metrics play and regularly perform these calculations myself.
As you begin this process, remember that these figures are estimates meant to guide your strategy. The more comprehensive your market research and historical data, the more accurate your planning will become.
Don’t just identify market opportunities—use your research to determine your target audience and devise strategies to engage them effectively with your products. Utilize these templates to clarify and structure your plans.
Riyanshi Chaplot
Riyanshi is an enthusiastic content creator and SEO strategist at Salesmate who curates information on marketing, sales, and customer experience. She loves to explore new places and meet new people when she is not working.