Understanding TAM, SAM, and SOM: A Comprehensive Overview

What is TAM SAM SOM?

TAM, SAM, and SOM are acronyms used in business and marketing to define different aspects of market size and potential. They help businesses to estimate the scope of their market at different levels and are crucial in strategic planning and market analysis.

TAM (Total addressable market)

TAM refers to the Total Addressable Market, which is the overall revenue opportunity available or total market demand for a product or service. It’s the broadest metric, representing the entire market for a product or service worldwide or in a specific geographical area. TAM helps businesses to understand the full potential of the market they are entering.

SAM (Serviceable addressable market)

SAM stands for Serviceable Addressable Market. It’s a subset of TAM and represents the segment of the market that can actually be reached or served by a company’s products or services. SAM narrows down the focus to the target market segment that is within the geographical reach and scope of the company’s capabilities.

SOM (Serviceable obtainable market)

SOM, or Serviceable Obtainable Market, is the portion of SAM that a company can realistically capture or serve in the short to medium term. It takes into account the current competition and market constraints. SOM is a practical measure of a company’s potential market share and is especially important for startups and new entrants to estimate a realistic market penetration.

Why understanding TAM SAM SOM is important for your business plan

When incorporating TAM, SAM, and SOM into your business plan, it provides a structured approach to market analysis and strategic planning. These metrics help in:

• Setting realistic goals: By understanding the SOM, businesses can set achievable revenue and growth targets.
• Tailoring marketing and sales efforts: Knowing the SAM helps in focusing marketing and sales efforts more effectively.
• Attracting investors: Demonstrating a clear understanding of TAM, SAM, and SOM in a business plan can make a more compelling case to potential investors, showing that you have a realistic grasp of your market’s potential.
• Resource allocation: These metrics guide where and how to allocate resources for product development, marketing, and expansion.

Calculating TAM SAM SOM (Formula and examples)

Calculating TAM, SAM, and SOM requires a blend of market research, analysis, and sometimes a bit of estimation. Here are ways to calculate each:

How to calculate TAM

• Formula

$\text{TAM}=\text{Total Number of Customers in Market}\times \text{Average Annual Revenue per Customer}$

This method involves identifying the total number of potential customers in a market and multiplying it by the average revenue that each of these customers is expected to generate annually.

• Calculation example

Imagine a company that produces specialty coffee machines. To calculate TAM using the bottom-up approach, they would:

1. Identify the total number of coffee-drinking households and businesses in their target market. Suppose there are 10 million coffee-drinking households and businesses.
2. Determine the average annual spending on coffee machines per household/business. Assume it’s $100 per year.

Then, the TAM would be:

$\text{TAM}=10,000,000\text{ (Customers)}\times \$100\text{ (Average Revenue per Customer)}=\$1,000,000,000$

So, the TAM for specialty coffee machines in this market is $1 billion.

How to calculate SAM

• Formula

$\text{SAM}=\text{Number of Target Customers in TAM}\times \text{Average Annual Revenue per Target Customer}$

This calculation is similar to TAM but narrows down to the segment of the market that your business can actually serve. It takes into account geographical limits, product/service applicability, and other operational constraints.

• Calculation example

Continuing with the coffee machine company, suppose they only serve urban areas, which constitute 60% of the total market. The SAM calculation would be:

1. Calculate the number of target customers in TAM (urban areas). That’s 60% of 10 million, so 6 million customers.
2. The average annual revenue per customer remains $100.

Then, the SAM would be:

SAM=6,000,000 (Target Customers)×$100 (Revenue per Customer)=$600,000,000

The SAM for urban specialty coffee machine market is $600 million.

How to calculate SOM

• Formula

SOM=SAM×Expected Market Share

This calculation involves estimating what percentage of the SAM your business can realistically capture in the near term, considering factors like competition, brand strength, market penetration strategies, and operational capabilities.

• Calculation example

For the SOM, let’s say the coffee machine company expects to capture 10% of the SAM in the first few years due to competition and brand establishment. The SOM calculation would be:

SOM=$600,000,000 (SAM)×10% (Expected Market Share)=$60,000,000

So, the SOM, or the achievable market share for the coffee machine company in the short term in urban areas, is $60 million.

Examples of TAM SAM SOM

Ecommerce business

For an ecommerce business that sells handmade crafts:

• TAM: The TAM would include the global online market for handmade crafts. Let’s say, after research, this is estimated to be $5 billion annually.
• SAM: The SAM would be narrowed down to the online handmade craft market in countries where the business operates. If the business operates in the US and Canada, and the market size in these countries is $1 billion, that would be the SAM.
• SOM: The SOM might be determined by the company’s initial market reach and competition. If the business estimates capturing 5% of the SAM in the first few years, the SOM would be $50 million.

Consulting firm

For a consulting firm specializing in digital marketing:

• TAM: The TAM could be the total global spending on digital marketing consulting services. Assume this is around $30 billion.
• SAM: The SAM for the firm would be the part of the TAM that can be serviced by the firm. If the firm specializes in small to medium-sized businesses in Europe, and this market is worth $3 billion, then that’s the SAM.
• SOM: Assuming the firm is well-established and expects to capture 10% of the SAM due to its strong client base and reputation, the SOM would be $300 million.

We can help

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