TAM, SAM, SOM Definition
TAM, SAM, SOM are business acronyms used primarily for market assessment, especially important for startups and businesses planning to introduce new products or services
Among lack of capital, inadequate organization, and poor knowledge of their market, the last cause weighs the heaviest. Almost half of new business owners face lack of market for their goods and services, and they would be better off putting to use three vital business acronyms: TAM, SAM, and SOM.
Each of them, if applied professionally, greatly ups the chances your business will take off and flourish.
These tools are especially helpful when launching new products or services.
TAM (Total Addressable Market)
TAM is the total amount of a product available in a market at a given price. TAM is a tool to measure the maximum sales a business can hope to realize in a given market at a given price. This metric represents the broadest coverage of the whole market of a particular product. Is it practical? Naysayers will say it is too far-fetched, as it aims at a theoretical 100 -percent market share; others will find practicality in it, as it does portray the market, though does it in wide strokes.
SAM (Serviceable Available Market)
SAM is the total sales volume of a product or service that your business can sell within its operational reach and current business model. In other words, it’s a segment of the TAM that is within your reach. Essentially, it’s the part of the market that you can actually target realistically, given your existing distribution channels and geographic reach.
Key constraints for SAM might include:
- geographical limitations,
- regulatory barriers
- market access issues
SOM (Serviceable Obtainable Market)
This is the realistically achievable market share that your company can capture in the short-to-medium term. It considers current competitions, regulatory environments, and your company’s current capacity. It’s a subset of SAM and is often used to forecast early revenue growth stages for startups and new products.
For SOM, major limitation factors might consist of:
- competitive presence
- company’s resource capabilities
- market readiness
A TAM, SAM, SOM Example
Let’s consider a company that develops an educational app targeted at high school students in the United States.
The TAM would be all high school students globally who have access to smartphones and could potentially use the app. Suppose there are 200 million high school students worldwide, and each subscription sale is worth $10 pre year, 2 billion annually.
The SAM would be $150 million annually, if the company decides to focus only on the U.S. market due to language and curriculum alignment, and there are 15 million high school students in the U.S.
The SOM would thus be $15 million annually (10% of SAM). Assessing their market penetration capabilities, initial marketing budget, and competition, suppose the company estimates it can realistically capture 10% of the U.S. market in the first few years.
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TAM, SAM, SOM Calculation
How to calculate Tam
A common method is to multiply the number of potential users by the average revenue per user (ARPU).
Identify all potential customers who could buy the product or service under ideal conditions where geographic and demographic limitations are ignored. Use market reports, industry data and research studies to estimate the total market size.
How to calculate SAM
To calculate SAM Narrow down the TAM to the portion of the market that your business can actually serve. This involves considering geographic boundaries where your business operates and where you can logistically deliver your products or services. Additionally, SAM is refined by the specific segments you target based on customer demographics and behaviors that match your offering.
How to calculate SOM
Often, calculations for SOM include setting realistic penetration rates based on historical data from similar products or initial sales data. Focus further on realistically estimating the fraction of SAM that you can capture. This accounts for competition, your company’s current reach, marketing efforts, and sales capabilities.
TAM, SAM, and SOM are essential metrics for businesses to understand market potential, focus resources effectively, and set realistic revenue targets. They help in strategic planning, identifying feasible markets, and scaling operations efficiently, thereby crucially influencing funding decisions and market entry strategies.
To Sum Up
TAM, SAM, and SOM are critical for businesses willing to measure their market potential, optimize resource allocation, and set realistic revenue goals. These metrics not only help in strategic planning, identifying optimal markets, and scaling operations efficiently, but also significantly impact funding decisions and market entry strategies.
