The Essential Guide to Calculating TAM, SAM, and SOM for Business Success

In order to help your business avoid potential obstacles, we have put together a comprehensive guide on how to accurately calculate your industry's total addressable market (TAM), serviceable addressable market (SAM), and share of market (SOM).

Understanding TAM, SAM, and SOM

TAM, SAM, and SOM are important metrics for understanding the market that your organization operates in. These acronyms stand for Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market, respectively.

Total Addressable Market (TAM)

The total addressable market represents the total demand for a product or service within a specific market. It serves as an indicator of the maximum potential revenue that a business can generate by selling their product or service to the entire market. This metric is valuable for determining market growth potential and product-market fit.

Serviceable Addressable Market (SAM)

While a business may have the potential to tap into their entire total addressable market, there may be limitations such as specialization or geographic constraints. The serviceable addressable market is a more realistic measure of the market that a business can realistically acquire. This metric helps businesses set achievable goals and understand their potential customer base.

Serviceable Obtainable Market (SOM)

In reality, it is unlikely that a business will capture 100% of their serviceable addressable market unless they are a monopoly. The serviceable obtainable market takes into account competition and provides a more realistic estimate of a business's market share. This metric is useful for setting short-term growth targets and informing competitive strategies.

The Importance of TAM, SAM, and SOM

TAM, SAM, and SOM are crucial metrics for business strategy and growth planning. They offer valuable insights into a market's potential and serve as a simple and concise way to present the value of an idea. These metrics help businesses understand their target audience and income opportunities, making them valuable when seeking funding from investors.

Furthermore, TAM, SAM, and SOM assist businesses in making informed decisions that impact their growth. Without a clear understanding of their serviceable addressable market, a business may overestimate their potential market share and negatively impact their SOM.

Calculating TAM, SAM, and SOM: A Template

Now that the importance of these metrics is clear, let's explore how to calculate them for your business. While conducting proper market research is necessary, the following formulas can provide a starting point for determining TAM, SAM, and SOM.

Total Addressable Market (TAM)

The most accurate way to calculate TAM is through a bottom-up analysis of your industry. This method involves counting the total number of customers in the market and multiplying it by the average annual revenue per customer.

Serviceable Addressable Market (SAM)

To determine your SAM, identify potential customers that align with your business and multiply that number by the average annual revenue per customer in your market.

Serviceable Obtainable Market (SOM)

To calculate your SOM, divide your previous year's revenue by the serviceable addressable market at that time to determine your market share. Then, multiply your market share by the current year's serviceable addressable market to estimate your SOM.

Maximizing Market Opportunities with TAM, SAM, and SOM

Remember, these figures are estimates and should be used as a guide for your business strategy. The more research and data you gather, the more accurate your calculations will be. Utilize this information to identify your target audience and develop effective strategies for engaging them with your products. The templates for calculating TAM, SAM, and SOM can serve as a roadmap to achieving your business goals.