Unlocking Market Potential: The Power of TAM, SAM, and SOM

Embarking on a new business endeavor can be an exhilarating experience. However, delving further into the venture reveals the crucial importance of understanding various financial models and the target market to gain insight into the target audience and accurately estimate the business's growth potential.

Failure to grasp these fundamental concepts may result in entering a market without a product-market fit or setting unrealistic revenue targets for the business. 

To help mitigate these risks, we present a detailed guide outlining key financial parameters that serve as the foundation for any effective marketing and sales strategy. These parameters include Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM).

TAM, SAM, SOM: What do they mean?

1. TAM (Total Addressable Market) : TAM, or Total Addressable Market, defines the complete market scope within which your product or service can operate. It signifies the highest revenue potential attainable by a business within a specific market. For instance, if an audio company were to secure 100% market share over time, its TAM would encompass the entire global audio market.
2. SAM (Serviceable Addressable Market) : Due to specialization and geographic constraints, businesses cannot cater to 100% of market demand. SAM, or Serviceable Addressable Market, is the portion of TAM, a company can realistically serve with its current product offerings and distribution channels, providing a more accurate estimate of market size. For example, an audio company in Delhi selling only speakers would focus on nearby areas initially.
3. SOM (Serviceable Obtainable Market) : SOM, or Serviceable Obtainable Market, determines the real-time number of customers benefiting from your products, considering competition. It is crucial for setting short-term targets and realistic revenue goals. For example, SOM is calculated based on the audio industry's competitive landscape.

Why are TAM, SAM, SOM important?

1. Assessing market size potential.
2. Crafting effective Go-To-Market strategies.
3. Evaluating investment opportunities.
4. Analysing competition.
5. Estimating growth and revenue potential.

TAM SAM SOM: What Do They Mean & How Do You Calculate Them?

1.TAM:

TAM is calculated by multiplying the number of customers in a market, which is derived from market research, by the annual value per customer, obtained from your company's historical customer data.

*TAM = # of Customers in a Market X Annual Value per Customer

Example:

For a market of 6,000 customers at Rs.100 ACV, the TAM would be

Rs. 6,00,000.

2.SAM:

SAM is determined by multiplying the target segment of TAM by the annual value per customer. SAM represents the percentage of TAM that aligns well with the products and services specified in your business model.

*SAM = Target Segment of TAM X Annual Value per Customer

Example:

Only 3,000 of the 6,000 potential customers live in the

geographical area your business serves. With a Rs. 100 ACV, the

SAM is Rs. 3,00,000.

3. SOM:

To compute SOM, multiply last year's market share by this year's SAM. To find last year's market share, divide last year's revenue by last year's SAM.

*SOM = Last Year's Market Share X This Year's SAM

Example:

Last year's SAM was Rs. 4,00,000 and your revenue was Rs. 1,50,000 (37.5%). If

This year's SAM is Rs. 5,00,000, multiply that by .375. This equals a SOM of

Rs. 1,87,500.

TAM, SAM, SOM: Your Roadmap to Market Domination

As you begin, remember that these numbers are just estimates to help guide your planning. By conducting thorough market research and collecting historical data, you'll be able to refine your strategy more accurately over time.

Take the time to not only identify opportunities in your market, but also use your research to pinpoint your target audience and strategize on how best to connect with them through your products.