TAM, SAM & SOM: What are these metrics and why are they important?

Whether you’re starting a business or wanting to grow one, it’s important to know the market. 

This means you need to understand the potential profit of a sector, size up the competition and assess market opportunities. But how can you do that? 

Luckily, there are three metrics that can help you do this effectively: Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market (also known as TAM, SAM and SOM). 

In this blog, we look at each metric so you know what they mean and how to calculate them to drive business success. 

1. Total Addressable Market (TAM)

Total Addressable Market refers to the total revenue opportunity available in a particular market. 

TAM represents the maximum revenue opportunity available if a company were to capture 100% market share. This means considering every potential customer or segment that could benefit, as well as taking limitations or factors such as competition or market saturation into consideration. 

Why is measuring TAM important?

TAM is a crucial metric for investors, entrepreneurs, and businesses in evaluating the attractiveness and scalability of a market opportunity. It helps businesses understand the revenue potential of their product or service and the potential of a business. 

It can also guide strategic decision-making related to market entry and expansion, pricing strategies, product development, and the allocation of resources.

How do you calculate TAM?

You can calculate TAM by multiplying the number of potential customers/users by the average revenue each customer would generate annually. This calculation can be based on factors such as location, demographics, industry trends, and pricing models.

The formula for calculating TAM is: 

# of customers/users in market X Annual value of each customer/user

For example, let’s say your business has a potential customer base of 9,000 with a value of $1,300 each. Your TAM would be $11.7 million. 

2. Serviceable Addressable Market (SAM)

SAM (Serviceable Addressable Market) is the portion of the TAM that a company can target and serve with its products or services. It is the subset of the total market that aligns with a company's resources, capabilities, and strategic focus.

By understanding and targeting the SAM strategically, companies can maximize their revenue growth, market share, and long-term success.

Why is measuring SAM important?

SAM can help define a company's target market strategy and prioritize resources to the most lucrative opportunities. It can also help companies focus on segments that offer the highest potential for profitability to optimize marketing and sales efforts, and product development initiatives.

It can also help you understand the competitive landscape by looking at the strengths, weaknesses, and market positioning of competitors and identifying competitive threats and opportunities to differentiate.

How do you calculate SAM?

SAM can be measured by taking various factors into account such as target customer segments (through market research), geographic reach, competition, market penetration strategy and regulatory constraints. 

It involves analyzing market data and segmenting the TAM based on criteria relevant to the company's business model and capabilities.

The formula for calculating SAM is: 

Target segment of TAM X Annual value for each customer/user 

For example, only 3,000 customers are based in the location you are targeting. The value of each customer is $1,300, so your SAM value is $5.85 million.

3. Share of Market (SOM)

SOM (Share of Market) is the portion of the total market or SAM that a company or brand currently captures or controls. It is expressed as a percentage and indicates the company's position in the market compared to competitors.

It is a measure of a company's performance relative to its competitors and gives insight into its market position and competitive strength. 

Why is measuring SOM important?

SOM reflects the company's market penetration and competitive position relative to others in the market. It helps companies understand their performance in specific areas of the market and identify opportunities for growth and expansion.

Strategies for increasing SOM may include market expansion, product innovation, brand building, customer acquisition initiatives, and competitive pricing strategies.

How do you calculate SOM?

You can calculate SOM by dividing the company's revenue or sales by the total market sales or revenue and multiplying by 100 to get a percentage. 

The formula for calculating SOM is:

SOM= (Company’s Sales or Revenue/Total Market Sales or Revenue ) X 100

Conclusion: TAM, SAM & SOM

These metrics can evolve due to advances in technology (just look at the impact of artificial intelligence), changes in market conditions, shifts in customer preferences and regulatory developments. So it’s important to continuously monitor and assess each one to adapt to changing market dynamics.

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