What is TAM, SAM, SOM? Whys is it Important? How to Calculate with Example
Updated: Oct 14, 2022
TAM, SAM, and SOM are three marketing acronyms you're likely to come across. These are three terms that help define the size of a market and how your company can find its place within it. In this article, we will discuss TAM, SAM, and SOM and how to calculate with an example.
Table of Contents
What are TAM, SAM, and SOM? Calculate with Example
Total addressable market (TAM): This is the total market for a product or service, including both potential and current customers. The size of your TAM will depend on the nature of your business and the products or services you offer. To calculate your TAM, you will need to consider both the number of potential customers and the amount they are willing to spend. The total addressable market is important because it represents the upper limit of sales that a company can achieve.
Example: Starting a coaching classes chain like Byju’s. Its TAM will be the worldwide student market. Let us say there are 900 million students worldwide. The average revenue generated per student for coaching classes annually is $500. Then the TAM will be,
TAM = 900 MILLION x $500
TAM = 450000 MILLION DOLLAR
TAM = 450 BILLION DOLLAR
Serviceable addressable market (SAM): The serviceable addressable market is the portion of the total addressable market that a company can realistically serve. It is the portion of the market you can acquire based on your business model. This is determined by factors such as geographical location, distribution channels, and production capacity. A company's SAM will be smaller than its TAM, but it's still an important metric. In some cases, a company's SAM can grow as it expands its sales and marketing efforts. However, in many cases, the size of a company's addressable market is static or slowly growing -- in that case, companies will need to look for other ways to grow their sales.
EXAMPLE: Taking things realistically, Byju’s can serve the students in India based on population, school syllabus, subjects they cover, and available teachers. Let us say Byju’s can serve 500 million students in India with the resources available to them. Then its SAM will be,
SAM = 500 MILLIONx$500
SAM = 250000 MILLION DOLLAR
SAM = 250 BILLION DOLLAR
Serviceable obtainable market (SOM): is the portion of the SAM that a company can realistically expect to capture. Calculate market share by dividing your revenue from the previous year by the SAM (Serviceable Addressable Market) of the previous year.
EXAMPLE: If Byju’s generated a revenue of 90 million dollars in the previous year. Then its market share will be,
Market share = (90 / 250000)
Market share = 0.00036
Now, SOM = PREVIOUS YEAR MARKET SHARE x THIS YEAR’S SAM (assume 300 billion dollars)
SO, SOM = 0.00036 x 300000 = 108 MILLION DOLLARS
It is important to note that the SAM and SOM are not static. They can change over time as a company's reach and capabilities change. For example, a company may initially only be able to reach 20% of its potential customers but, over time, as its reach expands, it may be able to reach 80% of them. As such, the SAM and SOM are always evolving and should be regularly reviewed and updated.
Why are TAM, SAM, and SOM Important?
Knowing your SAM and SOM is important for two reasons.
1. It allows you to set realistic sales targets. If you only expect to capture 20% of your SAM, then you should not set a target of capturing 100% of your SAM.
2. It allows you to communicate with your sales team on their specific targets. If they are all focused on the same target, they will be able to mutually support each other and track progress against the same goal. This will also help them to avoid justifying bad deals, which is a perpetual problem for many sales teams.
3. It is important to understand the size of your potential market because it will help you determine how much money and resources you should spend on marketing and how many staff members you need to successfully achieve your goals.
Example: If your TAM is $10 billion, your SAM is $1 billion and your SOM is 10%, then your target revenue would be $100 million. If you are early in your business model design phase or have not yet launched your product-market fit strategy, TAM, SAM, and SOM estimates will be broad guesses based on industry statistics. As you progress through the business model development process, these estimates will become more detailed and accurate.
Where is TAM, SAM, SOM Used?
1. TAM, SAM, and SOM are used in multiple industries for financial forecasting.
2. The method is useful for product managers or marketers who need to understand their market and the potential for their products within that market.
Conclusion
Finding the right investors for your startup is a challenging task. Presenting them with your idea and product with complete market research and analyzing your future position is important. Calculating your sales number will help the startup move forward with proper strategic planning. Also, it will help the team to see a vision and set a target in the long term. Having a detailed study will prepare your startup to disrupt the market.
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