When launching or creating strategies to grow your business, having a clear understanding of your market size is essential as it forms a strong foundation for success. This is where TAM SAM SOM comes into play. These terms may sound too technical and learning how to calculate TAM SAM and SOM may feel overwhelming initially. Essentially TAM SAM SOM are pretty simple techniques that help you estimate the potential for your business idea and create a go-to-market plan.
In this blog, we will delve into what exactly these terms are, how to calculate TAM SAM SOM and why TAM SAM SOM calculations are important for strategic market planning and business scalability.
What is TAM (Total Addressable Market)
TAM stands for Total Addressable Market, this reflects the revenue opportunity that a business has when having 100% market share, assuming there is no competition. It helps you understand the potential opportunities, and TAM calculations are used to regulate funding and allocation of resources that a business needs to invest in a new product/service. Of all three metrics, TAM forms the foundation, and we will understand what it is and how to calculate TAM.
TAM calculations are very useful as they allow you to understand the business’s potential and develop a go-to-market strategy. Remember that it’s not a goal you should aim for. No matter how great your product/service is and how efficiently you execute the strategy, it’s not possible to achieve the TAM calculations as it is calculated based on the assumption that there is no competition and you are only providing the product/service in the market.
How To Calculate TAM?
When understanding how to calculate TAM, there are two ways that you need to focus on.
Top Down Approach
The top-down approach to calculating TAM includes analyzing market data and reports. You can find many credible sources of market size reports, you can align the relevant data to your business goals to understand the potential market. When it comes to calculating TAM with a top-down approach, it is very common not to find the data that you are particularly looking for or data that may be outdated.
Bottom-Up Approach
Another way to calculate TAM is by using previous pricing and sales. Note down the number of total potential customers and multiply it by ACV- it stands for Annual Contract Value. ACV is the average revenue that a business gains from every customer contract.
To understand how to calculate TAM with this approach more easily, let’s take an example. For instance, you sell gym equipment such as treadmills at an average. You have identified your customers and concluded that 1000 gyms in the region will be interested in your product. Therefore, your TAM is $1.5 million.
What is SAM (Serviceable Addressable Market)
By now, you must have understood how to calculate TAM, now, it’s time to get more practical about your business. SAM refers to the portion of TAM that your business can cater to by your product/service. In simple words, calculating SAM is a way to understand no product/service can serve the total market.
How to Calculate SAM?
The process to calculate SAM is the continuance of the bottom up method that we used to get TAM calculation. In understanding how to calculate TAM SOM SAM, this is the stage where we step into reality and know how much your product/service can serve. In the initial stages of setting up and developing a business, everyone begins with the thought that their service is suitable for everyone in their industry, but obviously, this is not the reality.
To simplify the way to calculate SAM, let’s continue with the same example we used in TAM calculations. For instance, your product has a combination of features that make your equipment more suitable for high-end gyms. However, it doesn’t mean that small gyms will not invest in your equipment, but we will calculate SAM based on the total number of high-end gyms in the region. Let’s say there are 650 high-end gyms, which means that with an Annual Contract Value (ACV) of $1500, the SAM for your business will be $975000.
What is SOM (Serviceable Obtainable Market)
While understanding how to calculate TAM SAM SOM, the last step is Serviceable Obtainable Market, SOM is the total market size that your business is serving. SOM calculations are a critical aspect of assessing the performance of your business and its potential.
How To Calculate SOM?
When it comes to calculating SOM, keep in mind that it is calculated once you are functioning in the market. The SOM is calculated by your market share of last year and it is multiplied by the current SAM value.
To calculate SAM, you need to know your market share. Let’s imagine, you made $500,000 last year. To determine your market share, divide this number by SAM which is around 0.51 or 51% and your competitors have the remaining 49%.
If you earn more in the year than the number, then you are gradually capturing the market share from your competition. On the other hand, if you earn less, then you need to spend time researching the causes.
How To Calculate TAM SAM SOM: Easy Steps
Research Your Market and Segment Your Audience:
Start by researching your market and segmenting your audience based on factors like demographics, location, and customer needs. This helps ensure you’re focusing on the right market for your product or service.
Identify the Number of Potential Customers:
Use credible industry reports, insights, and market data to estimate the number of potential customers who might be interested in your product or service.
Estimate Average Revenue Per Customer:
Use data from your own business or industry benchmarks to determine the average revenue per customer. This can vary depending on your pricing model (e.g., subscription, one-time purchase).
Calculate TAM (Total Addressable Market):
Multiply the number of potential customers by the average revenue per customer to calculate TAM. This gives you the total revenue opportunity if your business captures 100% of the market.
Calculate SAM (Serviceable Addressable Market):
SAM is calculated by filtering out TAM based on realistic factors such as geography, customer demographics, interests, and other characteristics. This helps you focus on the portion of the market that your product or service can realistically serve.
Calculate SOM (Serviceable Obtainable Market):
To calculate SOM, you further refine SAM by considering factors such as competition, your business’s current resources, marketing budget, and brand awareness. SOM represents the portion of the market you can realistically capture in the near term based on your current capabilities.
How To Calculate TAM SAM SOM: Common Pitfalls
- Overestimating TAM (Total Addressable Market):
When it come to calculating TAM SAM SOM, most startups often overestimate TAM, leading to unrealistic business expectations. TAM represents the entire market demand for your product or service, and inflating this number can result in misguided strategic planning.
Solution: Ground your TAM estimation in realistic data. Use verifiable sources, and segment the market to exclude those who would never realistically use your product.
- Neglecting the Competitive Landscape:
Failing to account for competitors or market saturation can distort your SAM (Serviceable Addressable Market) calculation. SAM is the segment of the TAM that you can serve with your product or service, given your current business capabilities and the competitive landscape.
Solution: Analyze your competitor’s strengths and weaknesses, and consider how this affects the market you can realistically serve.
- Relying Solely on Secondary Research:
Many businesses base their TAM SAM SOM on secondary research alone, which can lead to assumptions that don’t hold up in practice. This is particularly true when the sources are outdated or lack credibility.
Solution: Balance secondary research with primary research, like customer surveys or interviews, to validate your market assumptions.
- Lack of Consistent Validation:
Markets change, and assumptions made in the early stages may not be true as time progresses. Failing to update your market research can lead to outdated or incorrect TAM SAM SOM calculations.
Solution: Regularly revisit and update your market analysis to account for evolving trends, customer behavior, and new competitors.
To avoid these pitfalls, businesses should focus on detailed market research, validation of assumptions, and maintaining a realistic, data-driven approach to TAM SAM SOM calculations.
Why Is TAM SAM SOM Important For Your Business?
TAM SAM SOM reflects crucial metrics of businesses of every size and this is why knowing how to calculate TAM SAM SOM is essential. Consider them as tools that empower you to make well-informed decisions and take your business to new heights of success.
No matter how great an idea or product/service you have, not knowing the total market size and understanding of your target audience can potentially make your ideas go in vain. By focusing on understanding how to calculate TAM SAM SOM, you will make better decisions for your sales and marketing strategies, set realistic objectives and evaluate your progress.
Understanding the market potential
TAM SAM SOM calculations will give you a clear understanding of how much business you can create in your market. It will help you work on realistic goals and make effective decisions while developing a go-to-market plan.
Growth Potential Analysis
Calculating TAM SAM SOM will help you identify new ways and opportunities to grow and expand your business. For instance, by observing your SAM value, you might realize that your startup has the potential for expansion to new locations and more products.
Efficient Resource Allocation
With TAM SAM SOM data in place, startups and well-established businesses can efficiently optimize the budget and allocate it to core areas of your business. For instance, you may realize that you need to generate brand awareness and decide to invest more resources in the marketing aspect. Making the right decisions in the initial stages will help you grow your business efficiently and effectively.
How To Use TAM SAM SOM To Grow Your Business?
TAM SAM SOM calculations are used to expand and grow your business in many ways like exploring new market possibilities and customizing the marketing and business expansion strategies.
Growth Opportunities
Calculating TAM SAM SOM can help with identifying new opportunities in your existing or even new market.
Clarity Over Business Idea
TAM SAM SOM will help you achieve clarity on your startup idea by offering many valuable insights and a clear understanding of the potential business opportunity.
Creating Go-to-Market Strategies
TAM SAM SOM calculations enable startups and established businesses to curate effective strategies by identifying potential customers and more profitable opportunities.
Funding Opportunities
Knowing how to calculate TAM SAM SOM is crucial as it helps investors evaluate the investment opportunity and a growing TAM SAM SOM indicates the significance of your startup.
Measuring The Progress
With TAM SAM SOM data, startups can effectively measure the progress and the results in your existing market and expand to new markets.
Final Thoughts!
By now, you must have understood how to calculate TAM SAM SOM and how important they are in the growth of your business. When it comes to calculating TAM, it is crucial to remember that initially, the TAM can be low, but, as the brand grows, its target audience and TAM also increase gradually.
Understanding how to calculate TAM SAM SOM can provide clarity on the size of your market and guide your business strategy. These metrics help you set realistic goals, allocate resources effectively, and communicate growth potential to investors. By using TAM SAM SOM wisely, you can take a strategic approach to growing your business, ensuring your efforts are focused on the right opportunities.
