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TAM, SAM, AND SOM: What are these metrics, and what justifies their importance?

Updated: Aug 20



Publication date: 16.08.2024


In the world of business and marketing, understanding the size and potential of your target market is crucial for making informed decisions and setting realistic goals. Three key metrics that help businesses gauge their market potential are TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market). Let's dive into what these metrics mean and why they are important for your business.


 

What is TAM?

 

TAM, or Total Addressable Market, represents the total revenue opportunity for your product or service if you were to capture 100% of the market. It is computed by multiplying the average revenue per client by the total number of possible consumers. TAM gives you a broad view of the maximum potential of your market, but it doesn't consider factors such as competition, geographic limitations, or your ability to serve the entire market.


What is SAM?

 

SAM, or Serviceable Addressable Market, is the portion of TAM that your business can realistically serve. It is calculated by filtering TAM based on factors such as geographic location, demographics, and other relevant criteria. SAM takes into account your current business model, resources, and capabilities, allowing you to focus on the segment of the market that you can effectively target.

 

What is SOM?

 

SOM, or Serviceable Obtainable Market, is the portion of SAM that your business can reasonably capture. It is calculated by further filtering SAM based on factors such as market competition, brand awareness, and marketing budget. SOM represents the realistic market share that your business can achieve in the short to medium term, given your current resources and strategies.

 

 

Why are TAM, SAM, and SOM important?

 

1. Setting realistic goals: By understanding the size of your TAM, SAM, and SOM, you can set achievable goals for your business. Aiming for a realistic percentage of your SOM is more practical than trying to capture a large portion of your TAM.

 

2. Attracting investors: Investors are more likely to be interested in your business if you can demonstrate a clear understanding of your market potential. Providing a breakdown of your TAM, SAM, and SOM in your business plan shows that you have done your market research and have a realistic view of your market.

 

3. Focusing your marketing efforts: Knowing your SOM allows you to focus your marketing efforts on the segment of the market that you can realistically target. This helps you optimize your marketing budget and resources for maximum impact.

 

4. Identifying growth opportunities: By regularly reviewing your TAM, SAM, and SOM, you can identify areas for growth. As your business expands its capabilities or enters new markets, your SAM and SOM may increase, providing opportunities for further growth.

 

Real-World Applications of TAM, SAM, and SOM

 

Businesses across industries utilize TAM, SAM, and SOM metrics to gain a clear understanding of their market potential and make informed strategic decisions. For example, a startup developing a new mobile app would first calculate its TAM by determining the total number of smartphone users worldwide and multiplying it by the average revenue per user in the app's category. This gives them an idea of the maximum possible revenue opportunity.

 

Next, they would calculate the SAM by narrowing down to the specific countries, demographics, and device types their app is designed for. This helps them understand the portion of the TAM that is realistically accessible given their current resources and capabilities. Finally, they would estimate the SOM by factoring in competition, their brand awareness, and projected marketing budget. This allows them to set a realistic revenue target for the first few years.

 

In another case, a software company expanding into a new vertical market would use TAM, SAM, and SOM to evaluate the opportunity. They may find the TAM is large but the SAM is limited due to specialized requirements. Analyzing the SOM helps them decide if the vertical is worth pursuing with the resources they can allocate.

 

By breaking down their total market into TAM, SAM, and SOM, businesses gain a more nuanced view of their potential and challenges. This helps them set appropriate goals, allocate resources efficiently, and make strategic decisions to maximize growth. Regularly revisiting these metrics as the business and market evolve is key to maintaining a competitive edge.

 

Conclusion

 

TAM, SAM, and SOM are essential metrics for businesses looking to understand their market potential and make informed decisions. By calculating these metrics and regularly reviewing them, you can set realistic goals, attract investors, focus your marketing efforts, and identify growth opportunities. Remember, these metrics are not static; they should be regularly updated as your business evolves and the market landscape changes.



 

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