Are you a small or medium-sized business trying to crack the code of your market potential? Are you having trouble finding the sweet spot of what’s realistically attainable?
Market research sometimes feels like searching for a needle in a haystack, maneuvering through complex and irrelevant data. But it doesn’t have to be!
Hi, my name is AJ! Over that last decade, I have scaled (and recently exited) my business for multiple seven figures.
I created Small Business Bonfire (SBB) to help SMBs and entrepreneurs like you to find the answers they need in a clear, concise way.
So, take a seat, unwind, and let’s explore the world of TAM, SAM, and SOM. Understanding these terms could unlock your business’s potential and steer you toward long-term success.
Key Takeaways
- TAM, SAM, SOM are acronyms for part of the marketing process that involves assessing a business's potential market.
- Understanding TAM, SAM, SOM is crucial for SMBs to plan effectively and maximize returns on business growth investments.
- By understanding TAM, SAM, SOM, you can create strategic plans to stand out from competitors and capture a larger market share.
What is TAM in Business?
TAM stands for “Total Addressable Market,” which is the total potential market size of a product or service regardless of the company’s current reach or competition.
What is TAM (Total Addressable Market)?
TAM helps you understand the potential size of your market opportunity, which is essential for effective business planning.
This estimates the total number of people interested in your product or service (the number of potential customers).
Knowing your TAM can help you better align your strategy and determine how much effort to put into marketing or product development.
Think of it as your maximum possible sales if all other factors were equal.
This is most useful for early-stage companies looking to plan and grow their business.
How Do You Calculate TAM
TAM is usually calculated by multiplying the number of potential customers in your target market by the annual value they might generate for you.
Let’s say you have 1000 potential customers and each generates $200 of average revenue a year with you.
Number of Potential Customers x Annual Value of each Customer = TAM
$1000 x $200 = $200,000 = TAM
It’s important to note that when you calculate the total addressable market, it is a best-case scenario.
It assumes that all your potential customers have the same buying behavior and are all willing to spend the same amount on your product or service.
TAM Examples
For example, imagine your business sells dog food. Your TAM might include all dog owners in the United States.
There are about 65.1 million households that own at least one dog. You sell dog food at an average of $50 per month.
65.1 million x $50 = $3,255,000,000 = TAM (Per Month)
This figure is the maximum potential market size of your product. It’s important to understand that this doesn’t mean you’ll capture this entire market.
What is SAM In Business?
SAM stands for “Serviceable Addressable Market,” which is the estimated market size you can capture with your current resources. You may also hear SAM referred to as “Serviceable Available Market.”
What is SAM (Serviceable Addressable Market)?
SAM estimates the portion of your total addressable market you can hypothetically reach with your current resources.
It takes into account factors such as:
- Marketing Budget
- Geographic Area
- Product Availability
- Customer Segmentation
- Industry Trends
Think of it as what you can capture, given all your constraints.
This can help you better align your strategy and determine how much effort to put into marketing or product development.
How Do You Calculate SAM
SAM is calculated by multiplying the number of potential customers in your target segment of TAM by the annual value they might generate for you.
Let’s say you have 1000 potential customers in your TAM, and you estimate that you can reach only 500 of them with your current resources, each generating $50 of average revenue a month with you.
Number of Potential Customers in Your Target Segment of TAM x Annual Value of each Customer = SAM
500 x $50 = $25,000/Month = SAM
It’s important to note that this calculation is an estimate based on the resources available to you at the moment.
This figure is not set in stone and can change depending on available resources and industry trends.
SAM Examples
For example, imagine the business (from before) that sells dog food. Your SAM might include all dog owners within a 50-mile radius of your store.
About 1 million households own at least one dog within your radius. You sell dog food at an average of $50 per month.
So your SAM would be 1 million x $50 = $50,000,000.
This figure is the potential market size you can reach with your current resources.
This doesn’t mean you’ll actually capture this entire market.
What is SOM in Business?
SOM stands for “Serviceable Obtainable Market,” which is the estimated market size that you can capture.
What is SOM (Serviceable Obtainable Market)?
SOM is an estimate of the portion of your serviceable addressable market that you can actually capture.
It takes into account factors such as:
- Market Dynamics
- Competition
- Customer Retention
- Industry Trends
Think of it as what you can actually capture, given all the dynamics in your favor and against you.
This can help you better align your strategy and determine how much effort to put into marketing or product development.
The big difference between SAM and SOM is that SAM assumes you have the resources to capture your target market, while SOM takes into account the actual dynamics in the market.
How Do You Calculate SOM
SOM is calculated by taking last year’s market share and multiplying it by this year’s SAM.
Step 1: Find last year’s market share.
To find last year’s market share, you need to divide last year’s revenue by last year’s SAM.
Using the $100,000 SAM from above, let’s pretend your revenue last year was $40,000.
Last Year’s Revenue/Last Year’s SAM = Last Year’s Market Share
40,000/100,000 = 0.4 or 40% = Last Year’s Market Share
Step 2: Find Your SOM
Let’s say your SAM this year is $150,000.
Last Year’s Market Share x This Year’s SAM = SOM
0.4 x $150,000 = $60,000 = SOM.
In this example, your SOM would be $60,000. Given all the dynamics in the market, this is the estimated market size you can capture.
SOM Examples
Using the previous dog food business, let’s pretend your SAM this year was $50,000,000, and you figure out that your last year’s market share was 0.35 or 35%.
So your SOM this year would be 0.35 x $50,000,000 = $17,500,000.
Remember, this figure is just an estimate and can change depending on industry trends and other factors.
Who Uses TAM SAM & SOM?
TAM, SAM, SOM – the essential trio used by businesses big and small.
They’re like the secret sauce that even the savviest entrepreneurs can’t resist. So, who’s in on the action?
Here are some of the groups who can’t get enough of these calculations.
Startups
Startups often use TAM, SAM, and SOM to better understand the potential of their products or services.
Having a business idea is one thing, but understanding the market size and potential is another.
This helps them assess their target market’s size and determine how much effort should be put into marketing or product development.
Knowing your TAM, SAM, and SOM can help startups determine whether they have enough resources to capture their target market.
Small Businesses
Small businesses can use TAM, SAM, and SOM to determine the potential size of their target market.
They can also use these calculations to better understand the market dynamics and figure out how much effort they should put into marketing or product development.
Some questions that TAM, SAM, and SOM can help answer include:
- Is the market big enough for my product/service?
- How much of the market can I capture with my current resources?
- How much effort should I put into marketing and product development to get maximum returns?
Large Businesses Going into New Markets
Large businesses can use TAM, SAM, and SOM to better understand a new market they’re entering.
This helps them determine the total market demand and how much effort should be put into marketing or product development.
When you are going after a new market, TAM, SAM, and SOM can give you a better idea of the potential size.
Once you have the size, you can then plan your resources accordingly.
Importance of TAM, SAM & SOM
TAM, SAM, and SOM can help businesses of all sizes understand their target market.
These metrics help:
- Determine the size of their potential customer base
- Identify which segments they should target
- Calculate the total addressable market for a specific product or service
There are also some other excellent benefits that I have listed below.
Help Show Investors the Opportunity
TAM, SAM, and SOM are great tools for showing potential investors what kind of opportunity is on the table.
Having an idea is one thing, but being able to show them the size of your target market helps give them a better understanding of the opportunity.
A bottom-up analysis is often used to show potential investors the market’s total size.
Bottom-up analysis is a market sizing method that uses primary and secondary research data to estimate the size of your target market.
The more accurate your TAM, SAM, and SOM are, the easier it will be for investors to identify potential opportunities.
Help Plan a Business Strategy
TAM, SAM, and SOM can also help businesses plan their strategy and modify their business model.
These metrics help identify the potential size of your customer base and where you should focus your resources to get maximum returns.
For example, let’s say you are trying to enter a new market. Knowing the total addressable market (TAM) for that market can help you understand how much effort should be put into product development and marketing.
It can also help you determine how much capital to invest in the market and what pricing models would work best for your product or service.
Help Plan for Short-Term Growth
TAM, SAM, and SOM can play a pivotal role in planning for short-term growth.
Having a good grasp of these metrics helps businesses set their short-term objectives and goals, ultimately driving growth and boosting profitability.
Here are a couple of ways these calculations can help with short-term growth planning:
- Identify Potential Market Segments: By understanding the total addressable market (TAM), businesses can identify untapped or underserved market segments, creating immediate growth opportunities.
- Allocate Resources Efficiently: Businesses can allocate resources effectively with Serviceable Obtainable Market (SOM). It estimates the market portion a company can capture, helping prioritize resource utilization for maximum returns.
- Formulate Marketing Strategies: The Serviceable Available Market (SAM) helps develop targeted marketing strategies. By identifying the reachable market for a company’s offerings, businesses can customize their marketing efforts to engage the most receptive audience, boosting sales and fostering success.
Help Understand Growth at Scale
TAM, SAM, and SOM are effective tools for understanding a company’s growth potential at scale.
For example, let’s say your business is looking to expand to the global market.
Knowing the total addressable market (TAM) for the entire market can help you get an idea of how much effort should be put into product development and marketing.
TAM, SAM, and SOM can also help you understand your growth potential by:
- Forecasting revenue growth
- Identifying potential challenges
- Allocating resources accordingly for maximum returns
- Estimating potential market share
If you don’t understand the size of your target market, it can be difficult to plan for long-term growth.
TAM Vs. SAM Vs. SOM
Now that you know the importance of TAM, SAM, and SOM, let’s take a closer look at each metric compared to the other.
Let’s imagine you’re organizing a pizza party and trying to figure out how many guests you can invite, how many will actually show up, and how many can fit into your living room.
This is where our trusty trio – TAM, SAM, SOM – comes in handy.
- TAM is like the entire pizza-loving population of your city. But let’s be realistic, your budget isn’t limitless, nor do you have the resources to feed everyone.
- So, you narrow it down to SAM, your circle of pizza-loving acquaintances. This is a more realistic group, but not everyone will show up. Some might have other plans, be watching their diet, or be too lazy to leave their house.
- Then comes the SOM – your close friends, family, neighbors, or colleagues, the ones who would definitely show up for your party(a portion of the SAM). This is the bunch you’re sure you can squeeze into your living room for a cozy pizza night.
In business terms, TAM would be all potential customers, SAM is those you can realistically target, and SOM is the part of the market you’re likely to capture in the near future.
While all three metrics are essential, they must be used in conjunction with each other to get the most accurate picture of potential market opportunities.
Final Thoughts on TAM SAM and SOM
I love using TAM, SAM, and SOM when breaking into a new market OR launching a new product.
By understanding how each of these metrics works, you can better understand the potential market size and allocate resources accordingly.
This will help you develop your business strategy, maximize returns, and, most importantly – drive success!
Let us know if we missed anything in the comments below! Good luck!