TAM, SAM & SOM: Understanding Key Market Metrics and Their Importance

What is TAM?

The whole revenue potential that would be available for a good or service if it were to take up 100% of the market is known as the total addressable market, or TAM. 

TAM is frequently used in business planning and investment negotiations and is essential for understanding the potential size of the market. 

TAM computation aids in deciding whether a market is big enough to explore.

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

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. 

What is SAM?

A fraction of the total addressable market (TAM) that a business can service with its current offerings is known as the serviceable available market (SAM). It is a subset of TAM that accounts for variables like target market, target area, and technological prowess. 

Since SAM takes into account the business's present capabilities and priorities, it is more practical than TAM.

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.

What is SOM?

The portion of SAM that a business can grab shortly is known as the Serviceable Obtainable Market (SOM), and it depends on several variables including operational capability, market trends, and competition. 

SOM is frequently used to synchronize marketing efforts and set realistic sales targets.

The formula for calculating SOM is:

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

Why Do TAM, SAM, and SOM Matter?

Businesses can use these measures to make well-informed decisions about investment, growth, and market entry. Businesses may identify opportunities, allocate resources, and reduce risks by having a solid understanding of TAM, SAM, and SOM.

• Strategic Planning: By understanding TAM, SAM, and SOM, companies may set more reasonable growth targets and choose wisely when it comes to their investments.
• Competitive Advantage: By enabling businesses to concentrate on the most accessible segment of the market, an understanding of SOM gives them an advantage over competitors.
• Investor Confidence: By highlighting expansion opportunities, these measures are frequently used by investors to assess market potential and assist businesses in obtaining finance.

How Are TAM, SAM, and SOM Calculated?

1. figuring out TAM

Multiplying the total number of possible clients by the average revenue per client yields the total addressable market (TAM). If one million potential customers pay $100 for your service each, for instance, your total addressable market (TAM) is $100 million.

2. SAM computation

By focusing your TAM on the particular market segments you can service, you may calculate your SAM. If you are limited to serving specific industries or locations, 

for example, your SAM will be lower than your TAM.

3. Finding SOM

The most exact is SOM, which stands for the actual market share that your SAM can achieve. Your SOM is impacted by variables such as your marketing budget, sales team, and competitors.

Conclusion

Understanding TAM, SAM, and SOM is critical for any business looking to scale and succeed in competitive markets. 

These metrics offer valuable insights into market size, potential, and achievable goals, helping you build a solid growth strategy.