As a marketer, I typically discover myself sitting down at my desk with a calculator to do some primary math. And more often than not, I’m in a kerfuffle with three acronyms: TAM SAM SOM.
Calculating your complete addressable market (TAM), serviceable addressable market (SAM), and serviceable obtainable market (SOM) may be useful past the realm of simply advertising and marketing.
Enterprise house owners can use these calculations to find out the viability of a enterprise. Product groups can validate new product choices. However that’s simply the tip of the iceberg relating to the potential of the TAM, SAM and SOM trio.
Ignoring these numbers may be detrimental. You may enter a market that doesn’t have a big sufficient market dimension to persuade buyers to again you, or you might set an unrealistic income aim for your small business and burn your staff out.
That can assist you keep away from these points, I’ve put collectively a information that’ll train you precisely calculate your business’s total addressable market, serviceable addressable market, and share of market.
Desk of Contents
TAM SAM SOM
TAM, SAM, and SOM are acronyms for 3 metrics to explain the market your group operates in — Whole Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market.
These metrics are key parts of a marketing strategy, notably as you craft your marketing and sales strategy, set reasonable income targets, and select to enter the markets which are price your time and sources.
Earlier than I break down use these in your small business, let’s get clear on what TAM, SAM, and SOM are and their relationship with each other.
TAM SAM SOM Definitions
For those who’re new to TAM SAM SOM, it’s straightforward to really feel such as you took a incorrect flip someplace and landed in alphabet soup.
However, I would like you to know that TAM, SAM, and SOM are merely overlapping metrics that make it simpler to fine-tune your marketing strategy, establish achievable targets, and perceive the potential income and operational impacts of sure enterprise choices.
So let’s break them down.
TAM (Whole Addressable Market)
TAM Definition: The utmost potential demand of a selected market.
I do know it could actually look like discovering this info can really feel like a giant activity, so I’ll present you how to calculate TAM beneath.
Within the meantime, to simplify it additional, complete addressable market or TAM refers back to the total market size — extra particularly, the demand for a services or products. It’s the utmost quantity of income a enterprise can generate by promoting its services or products in a selected market.
Whole addressable market is most helpful for companies to objectively estimate a selected market’s potential for progress. This information additionally helps firms work out product market match.
SAM (Serviceable Addressable Market)
SAM Definition: The dimensions of the TAM you possibly can moderately goal as you construct your viewers.
As a result of limitations of your small business mannequin, which could embrace your specialization or geographic limitations, amongst different variables, you’ll have a troublesome time servicing your complete addressable market.
SAM is a phase of TAM you should utilize to establish the addressable potential of a market phase, or the quantity you possibly can realistically market to, making it simpler to estimate income and viewers targets.
Serviceable addressable market is most helpful for companies to objectively estimate the a part of the market they’ll purchase to determine their targets.
SOM (Serviceable Obtainable Market)
SOM Definition: The dimensions of the SAM you possibly can doubtlessly convert.
Except you are a monopoly, you probably can’t seize 100% of your serviceable addressable market. Even in the event you solely have one competitor, it could nonetheless be extraordinarily troublesome to persuade a whole market to solely purchase your services or products.
That’s why it’s essential to measure your serviceable obtainable market to estimate what number of clients would realistically profit from shopping for your services or products.
Serviceable obtainable market is most helpful for companies to find out short-term progress targets. It might probably additionally assist with aggressive consciousness and strategizing.
Why TAM SAM SOM Issues
TAM, SAM, and SOM are important to business strategy and growth planning. It’s because these metrics present how a lot alternative a specific market holds at each stage of enterprise progress.
TAM SAM SOM can also be helpful as a result of it’s a easy and succinct strategy to current the worth of an thought. This information offers groups an thought of the audience and revenue alternatives for a market or area of interest.
These metrics also can assist companies share key insights with buyers if they’re looking for funding. The method makes it simpler to make decisions that impact growth.
For instance, say you do not have a transparent image of the correct phase in your SAM. This might make your serviceable addressable market too huge, which may then influence your SOM.
“In my expertise, these instruments are extraordinarily informative when figuring out area of interest. Take the time, and perceive the chance or lack thereof together with your new goal,” says Lori Highby of Keystone Click.
Highby says as her group niches additional of their enterprise, they use numbers from market analysis studies from companies like Gartner, Forrester, and many others. in addition to authorities and commerce associations to calculate TAM, SAM, and SOM. They will then “discover out which area of interest is probably the most viable,” says Highby.
Tips on how to Use a TAM, SAM, and SOM for Your Enterprise
I do know that each one this sounds nice, however it may be powerful to know truly do TAM, SAM, and SOM calculations and use the information for your small business. So, let’s break this down into some steps you possibly can comply with.
Step 1. Outline your market.
Earlier than you are able to do a TAM SAM SOM, it’s worthwhile to work out what your market is, and what you’re advertising and marketing — a service, a selected product, or perhaps a class of merchandise.
To calculate this, get as clear and particular as you possibly can about your viewers, factoring points like:
- Geographic location(s).
- Gender.
- Age.
- Traits.
- Drawback your supply solves.
Step 2. Use a TAM calculation to search out the whole market dimension.
Now, it’s market analysis time — dig in to learn how many potential clients are on the market and the potential income worth if everybody in that market purchases.
For instance, if I’m taking a look at girls between the ages of 25 and 65, I’d wish to learn how many ladies match that definition. Then, I’d calculate the potential income if all these tens of millions of ladies purchased your product.
Step 3. Use a SAM calculation to search out the scale of your potential market.
Within the instance above, let’s say I work for a high-end luxurious girls’s skilled clothes retailer wanting on the U.S. market.
So, I wish to discover what number of girls match the demographic of ages 25 to 65 within the U.S. after which calculate the potential income.
Step 4. Use a SOM calculation to search out your potential market share.
Folks residing paycheck to paycheck aren’t prone to store my model, and girls who don’t work in places of work or don’t repeatedly attend skilled features are much less prone to be my goal market.
Since my SOM calculation is about estimating the portion of the SAM I can realistically market to, I’d discover it by refining my market by revenue and/or employment. I can then refine it additional by figuring out the portion of that market I’m prone to seize, given the aggressive panorama.
Step 5. Determine alternatives and challenges.
Now that you’ve the calculation, it’s time to dig into the information and strategize. I’ll begin by asking questions like:
- What’s the market doing now?
- What do your opponents do nicely? Poorly?
- Any gaps available in the market?
- Are there any segments of the market that aren’t being served?
Then, once I’m armed with solutions, I can take into consideration methods for standing out from the competitors and leaning into my strengths to achieve my market.
TAM, SAM, and SOM Template
Now that you already know what every of those acronyms is and what they’re used for, let’s get into the nitty-gritty of calculate TAM, SOM, and SAM.
Doing so requires superior market analysis forward of time, however listed here are the formulation when you’re in a position to get these figures.
Whole Addressable Market (TAM) Calculation
One of the best ways to calculate complete addressable market is by working a bottom-up evaluation of an business:
- Depend the whole variety of clients in a market.
- Determine the common annual income of every buyer on this market.
- Multiply the 2 numbers.
TAM is beneficial for:
- Beginning a brand new enterprise.
- Launching a brand new product, service, or product class.
- Reviewing market methods.
- Revising or revisiting your marketing strategy.
- Figuring out alternatives to extend market share.
Instance TAM Calculation
Utilizing our pattern high-end skilled girls’s attire for this calculation, I realized that the worldwide girls’s attire market was US$1.002 trillion in 2023 (IMARC group). Assuming progress of three.3% every year, we are able to estimate that quantity to be $1.035 trillion in 2024.
Professional tip: If you wish to make your life simpler when calculating TAM, use HubSpot’s TAM analysis template. It fully demystified the idea for me and helped me perceive not simply tam, but in addition the ACV itself.
Serviceable Addressable Market (SAM) Calculation
To calculate your serviceable addressable market:
- Depend up all of the potential clients that might be an excellent match for your small business.
- Discover the common annual income of a lot of these clients in your market.
- Multiply the 2 numbers.
SAM is beneficial for:
- Planning new advertising and marketing methods and gross sales ways.
- Doing market analysis and aggressive evaluation.
- Figuring out product viability.
Instance SAM Calculation
To proceed utilizing our pattern high-end girls’s skilled attire model, bear in mind we have been taking a look at girls ages 25-65. Utilizing information from the newest census, there are 86 million girls in that vary.
Let’s say that every 12 months, these 86 million girls spend $2,000 on common yearly on attire.
86 million x $2,000 = $172 billion SAM
And searching on the numbers, we’re not too far off. The U.S. girls’s attire market was estimated at $191.4 billion in 2024.
Serviceable Obtainable Market (SOM) Calculation
To calculate your serviceable obtainable market:
- Divide your income from final 12 months by your business’s serviceable addressable market from final 12 months.
- This proportion is your market share from final 12 months.
- Multiply your market share from final 12 months by your business’s serviceable addressable market from this 12 months to search out your new SOM.
SOM is beneficial for:
- Budgeting for operations and advertising and marketing.
- Creating achievable, affordable progress plans.
- Creating advertising and marketing and gross sales methods.
Instance SOM Calculation
Now right here’s the place we get extra hypothetical. As a result of the TAM and SAM converse to complete markets accessible, and SOM speaks to extra reasonable market share, we’re going to make up some numbers.
Our high-end girls’s skilled attire model has a better worth per merchandise however most clients are doubtless to purchase fewer items, and we’re prone to have fewer clients than, say, Walmart.
For the sake of spherical numbers, let’s say:
- We’ve got $500 million in income for final 12 months.
- The $172 billion SAM was 2023 numbers.
- The $191.4 billion SAM is the 2024 progress.
Word: I’m conscious that these numbers symbolize unrealistic year-over-year market progress charges — I’m merely offering them for the needs of exhibiting you the calculations in motion.
$500 million / $172 billion 2023 SAM = 0.003% market share
0.003% * $191.4 billion 2024 SAM = $574.2 million
Which means, based mostly on these fully fictional numbers that present drastically rising demand, my fictional attire firm can moderately anticipate 15% progress over final 12 months.
And if that’s correct, it has important repercussions for budgeting, operations, and manufacturing.
However until there’s one thing drastic taking place within the huge image that diminished spending in 2023 and elevated it in 2024, there’s an excellent probability these numbers aren’t reasonable, so it’s essential to return to the numbers to ensure we’re factoring in issues precisely.
Proper Measurement Your Market Alternatives with TAM, SAM, and SOM
Once I began my advertising and marketing, TAM, SAM, and SOM felt like abbreviation-heavy jargon. It was simpler to simply nod alongside and let the numbers go in a single ear and out the opposite.
Nonetheless, at the moment, I do know these numbers matter. I even run the calculations myself!
As you get began, remember the fact that these figures will largely be estimates to tell your technique. The extra market analysis you do and the extra historic information you construct up, the extra exact your planning can be.
Do not simply work out the alternatives in your market. Use your analysis to determine who you wish to goal and the way you propose to interact them together with your merchandise. Then, use these templates to make your plans clear.
Editor’s observe: This publish was initially revealed in March 2019 and has been up to date for comprehensiveness.
