Are you familiar with TAM, SAM, and SOM? If not, don’t worry; these acronyms may sound unfamiliar, but they hold valuable insights for entrepreneurs. Picture this: you have a fantastic business idea and you’re ready to take the plunge into the world of startups.
But have you ever wondered how big your potential market is? That’s where TAM, SAM, and SOM come into play, guiding you through the maze of market sizing.
TAM (Total Addressable Market) refers to the total demand for your product or service in a specific market.
SAM (Serviceable Available Market) represents the portion of the TAM that you can realistically target.
Lastly, SOM (Serviceable Obtainable Market) is the share of SAM that your business can actually capture.
These concepts are essential for any aspiring entrepreneur looking to understand the potential of their business idea. So, let’s unravel the mysteries of TAM, SAM, and SOM together!
The ABCs of Market Size: TAM, SAM, and SOM
Imagine you’ve developed a groundbreaking business idea and outlined a promising business plan. But before you take the plunge, there’s a critical step you need to undertake – determining market size of the market size. That’s where TAM, SAM, and SOM come into play. These acronyms represent three key components of any business model and are indispensable in understanding your business’s potential in the market.
TAM, SAM, and SOM stand for Total Addressable Market, Serviceable Available Market, and Serviceable Obtainable Market, respectively. Let’s break down each term.
Total Addressable Market (TAM)
TAM refers to the total market demand or the entire total available market, at your disposal. It represents the maximum revenue opportunity prevailing in the market without considering any market segments or territorial boundaries. To put it in perspective, if you’re in the fast food business, your TAM would be the total global market revenue of the fast food industry. However, only a fraction of this huge market size might be realistically accessible to your business, and that’s where SAM and SOM come into the picture.
Serviceable Available Market (SAM)
SAM, also referred to as the Serviceable Addressable Market, signifies the segment of TAM targeted by your products and services that can be realistically served. In our fast food example, your SAM might be fast food lovers in your local market, where you have the potential to operate and serve fast food restaurants. Determining SAM requires intensive market research, understanding your customer segments and their food habits, and assessing your business’s ability to meet their demands.
Serviceable Obtainable Market (SOM)
SOM, or the Serviceable Obtainable Market, is the portion of SAM that your business can realistically capture under current and forecasted market conditions. In the fast food context, SOM would be the fast food lovers who are likely to choose your restaurant over others in your locality. SOM depends heavily on your current business model, the value proposition you offer, and how well your sales teams can convince these potential customers.
By understanding your TAM, SAM, and SOM, you can set a realistic objective for your business, identify untapped customer segments, and optimize your business model for maximum revenue. The next question is, how can we calculate these numbers?
Calculating TAM, SAM, and SOM
In the realm of business, two primary approaches are commonly used to calculate TAM: the top-down approach and the bottom-up analysis.
The top-down approach to calculate total addressable market starts by looking at the entire total addressable market and then narrowing down to your specific market. It typically involves extrapolating from broad industry data using market research, historical data, and third-party sources. This approach helps to gauge the potential of the total available market, but it may lack precision when applied to your specific business.
On the other hand, a bottom-up analysis involves starting from your business and working your way up. It is grounded in direct knowledge of your customers, the average annual revenue and contract value, and the specific market’s potential. This method tends to provide a more realistic picture of your TAM, but it can be time-consuming and requires extensive market research.
To calculate SAM, you would estimate the percentage of the TAM that could be realistically served by your product or service. This requires a good understanding of your target market, the value theory behind your offerings, and your ability to penetrate the market.
For SOM, you need to analyze your immediate customer base, current market share, and historical sales data, along with a realistic estimate of how your business might grow in the medium term. Understanding your SOM is crucial for both existing businesses and startups seeking funding as it directly influences your revenue opportunity and your industry’s profit potential.
Armed with this understanding of TAM, SAM, and SOM, let’s delve into the role of these concepts in your business strategy and how you can leverage them to maximize business growth and revenue.
Building a Business Case with TAM, SAM, and SOM
Now that you’re familiar with TAM, SAM, and SOM, it’s time to integrate these concepts into your business strategy. Your business plan must align with the TAM, SAM, and SOM. These market size metrics contribute significantly to your business case, especially if you’re seeking funding.
Potential investors, including venture capitalists, are particularly keen on understanding your TAM, SAM, and SOM. They use these figures to assess your business opportunity, the market and potential upside, and the viability of your business model. For instance, a large TAM indicates a sizeable business opportunity and a larger potential upside. However, a relatively smaller SAM and SOM may imply stringent competition or limited market access.
Understanding and effectively communicating your TAM, SAM, and SOM to prospective investors can increase your chances of securing funding. These metrics present a realistic picture of your business’s revenue-generating capacity and growth potential. They also demonstrate your business acumen and your understanding of the market dynamics.
Using TAM, SAM, and SOM to Refine Your Business Model
TAM, SAM, and SOM aren’t just essential for impressing investors; they are equally critical for internal strategy formulation and business model refinement. Understanding your TAM can help you identify untapped customer segments in the market and explore new business opportunities. It allows you to envision the market’s maximum size, thereby guiding your long-term business plans and objectives.
Your SAM indicates the markets you can realistically serve based on your business model and capabilities. By calculating and tracking your SAM, you can measure your business’s growth and expansion over time. A growing SAM can be a strong indicator of successful market penetration or the successful introduction of new products or services.
SOM is perhaps the most immediate and practical of the three metrics. It provides a more direct reflection of your current business model, competitive landscape, and your sales teams’ effectiveness. Tracking SOM allows you to set realistic short-term goals and assess your business growth. A significant gap between your SAM and SOM could indicate challenges in market penetration, competition, or a mismatch between your value proposition and the market’s needs.
TAM, SAM, and SOM as Indicators of Market Share and Competitiveness
Finally, TAM, SAM, and SOM are key metrics in assessing your market share and competitiveness. A significant market share within your SOM indicates a strong competitive position and superior value proposition. Conversely, a smaller market share could indicate stiff competition or a weak value proposition, requiring you to revisit your business model.
Using TAM, SAM, and SOM, you can gauge your position in the market and the level of competitiveness. It enables you to identify the areas requiring improvement, refine your strategies, and set the path for business growth.
Making TAM, SAM, and SOM work for You: An Example
Let’s take a closer look at how TAM, SAM, and SOM work with a real-life example. Suppose you’re planning to open a fast food restaurant chain that serves only fast food with a unique twist— a diversity of global cuisines under one roof.
Your TAM here would be the total annual revenue of the fast food industry globally, considering everyone who consumes fast food as your potential customers. This figure is substantial and can be derived from industry reports and market research.
Your SAM, however, will be much smaller. It would be the market size of fast food lovers in the cities where you plan to open your restaurants and who appreciate global cuisine fast food diversity more.
The SOM, the most crucial figure for your immediate business plan, would be the customers likely to prefer your restaurant over other fast food chains in your target cities. This would be the fraction of the SAM that your restaurant can hope to capture based on your unique value proposition, marketing strategy, and the competitive landscape.
By defining your TAM, SAM, and SOM clearly, you will set a clear direction for your business and a solid base to convince investors of your restaurant’s potential.
How to Calculate TAM
Determining the total addressable market begins with market research. Here, you should take into account the entire market for your product or service, irrespective of geographical boundaries, unless your business is inherently limited to a specific locale. To calculate the total addressable market, you can use two common approaches: the top-down approach and the bottom-up analysis.
The top-down approach involves using industry research and reports to estimate the total market demand for a product or service. This method often uses broad industry data and applies it to the specific market. However, while it provides an understanding of the entire market, it’s often based on numerous assumptions and can lack precision.
On the other hand, a bottom-up analysis begins with the most specific and accurate data available, like the sales data of existing businesses, and extrapolates it to the entire market. This approach, while more time-consuming, tends to provide a more accurate and reliable estimate of the TAM.
Your serviceable available market, or SAM, is the portion of the TAM that your business can serve considering its business model, product offerings, geographical limitations, and other relevant factors. To calculate SAM, you need to identify and estimate your target serviceable addressable market within the TAM.
You can determine SAM through primary market research or by using historical data and industry reports relevant to your business and target audience. Also, take into account any geographical restrictions, customer segments you are targeting, and the scope of your product offerings.
SOM Calculation: The Final Piece of the Puzzle
Serviceable obtainable market, or SOM, is the portion of the SAM that you can realistically serve in the medium term. It’s a measure of your potential annual revenues. Calculating SOM requires an understanding of your target market, competitors, your value proposition, and your capacity to deliver your product or service.
To calculate SOM, start with your SAM and then estimate the market share you can capture based on factors such as competitive landscape, your business model, pricing, and unique selling and viable value proposition.
TAM, SAM, and SOM in Action: Revisiting the Fast Food Example
In the previous example of a unique global cuisine fast food chain, let’s assume your market research showed that the total global market for fast food is $600 billion (your TAM). However, your chain will initially operate only in the United States, and you find that the total market demand for fast food in the United States is $200 billion. This figure becomes your SAM.
To calculate your SOM, you need to estimate the portion of the U.S. market that your chain can realistically capture. Let’s say you believe you can capture 1% of the U.S. fast food market in the first few years, given your unique value proposition and initial capacity. This would mean your SOM would be $2 billion (1% of $200 billion).
Understanding your TAM, SAM, and SOM can guide your business strategies, help convince investors of the viability of your business idea and investment opportunity, and determine your maximum revenue opportunity.
Defining Your Target Group
After determining your TAM, SAM, and SOM, you can use this information to define your target group more precisely. This is critical for sales managers and sales teams looking to focus their efforts on potential customers who are most likely to generate revenues for the business.
Identifying your target group based on the TAM, SAM, and SOM analysis allows your sales team to focus on the customer segments that are most likely to convert and contribute to your SOM. It’s about aligning your sales efforts with the market segments that provide the highest revenue opportunity.
TAM, SAM, and SOM in Your Email Outreach
Using TAM, SAM, and SOM in your cold email outreach strategy can significantly increase its effectiveness. When you understand the size of your target market and its segments, you can create personalized and engaging emails that resonate with your target audience.
For instance, in our fast food chain example, if you have identified that a significant portion of your SAM consists of millennials who appreciate diverse food habits, your email outreach can include messages that highlight the unique global cuisine your restaurant offers.
Remember, only a fraction of your TAM or even SAM will initially be reachable through your marketing efforts. Your immediate focus should be on your SOM and potential customers within this very market segment.
Utilizing Mailarrow for Your Cold Email Outreach
Using a specialized tool like Mailarrow for your cold email outreach can streamline the process and improve your success rate. Mailarrow allows you to automate your cold email outreach without losing the personal touch. It also provides essential data and analytics that can help you refine your outreach strategy.
With the accurate estimation of TAM, SAM, and SOM, and using a powerful tool like Mailarrow, your business is better positioned to capture a larger share of the market and maximize its SOM.
TAM, SAM, and SOM: The Essential Metrics for Growth
TAM, SAM, and SOM are key components of any effective business strategy. They provide an in-depth understanding of the market size, guide your business plan service obtainable market,, and help gauge the potential success of your business idea.
The calculated use of TAM, SAM, and SOM in your cold email outreach can dramatically improve your success rate, leading to increased market share, business growth, and maximum revenue.
Remember, it’s not just about having a huge market size; it’s about identifying the right market segments, reaching out to them effectively, and converting them into loyal customers.
Frequently Asked Questions
What is an example of TAM, SAM, and SOM?
Let’s consider a hypothetical software company that develops productivity tools. If the worldwide revenue for productivity software is $10 billion per year, this would be the Total Addressable Market (TAM). However, the company’s software is currently only available in English, so they estimate their Serviceable Available Market (SAM) is the English-speaking portion of that market, say $5 billion. Finally, given their current resources and capabilities, they realistically expect to capture about 1% of that market within the next few years, equating to a Serviceable Obtainable Market (SOM) of $50 million.
What is the acronym TAM, SAM, and SOM?
TAM stands for Total Addressable Market, SAM stands for Serviceable Available Market or Serviceable Addressable Market, and SOM stands for Serviceable Obtainable Market.