Interpreting TAM, SAM, and SOM to make informed business decisions

"Market potential, when understood and harnessed, becomes the powerhouse behind business expansion."

As businesses and entrepreneurs venture into new markets or launch products and services, it's essential to have a clear understanding of market potential and opportunities. Three critical concepts in market analysis are the Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). Let's explore what these terms mean and how they can be calculated to make informed business decisions.

1. Total Addressable Market (TAM):

Total Addressable Market (TAM) represents the entire demand for a specific product or service within a particular market. It is the most extensive scope of potential customers that could benefit from the offering, assuming there are no constraints such as budget limitations or regulatory barriers.

To calculate TAM, consider the following factors:

a. Market Size: Determine the size of the target market in terms of potential customers or businesses that could benefit from the product/service.

b. Average Revenue per Customer: Estimate the average revenue generated from a single customer in a given period.

c. Total Timeframe: Define the time period (e.g., yearly, quarterly) for TAM to be estimated.

TAM = Market Size * Average Revenue per Customer

2. Serviceable Available Market (SAM):

Serviceable Available Market (SAM) is a more refined metric that accounts for limitations such as geographical restrictions, regulatory compliance, and the ability to reach specific customer segments. SAM is the portion of the TAM that business can realistically target with your product or service.

To calculate SAM, consider the following factors:

a. Geographical Constraints: Identify the specific regions or areas where business can operate or deliver products/services.

b. Regulatory Factors: Consider any legal or regulatory requirements that might limit market reach.

c. Target Customer Segments: Determine the customer segments that can effectively serve based on the business capabilities and resources.

SAM = TAM * (Percentage of Target Market)

3. Serviceable Obtainable Market (SOM):

Serviceable Obtainable Market (SOM) is the portion of the SAM that business can realistically capture based on sales and marketing strategies, competition, and other external factors. It takes into account the company's operational efficiency and ability to penetrate the market effectively.

To calculate SOM, consider the following factors:

a. Market Penetration: Analyse the historical sales data and industry benchmarks to estimate the percentage of SAM that can be captured.

b. Competitor Analysis: Understand the competitors' market share and assess how it may impact company's market penetration.

c. Marketing and Sales Strategy: Evaluate the effectiveness of the marketing and sales efforts in reaching potential customers.

SOM = SAM * (Percentage of SAM that can be realistically captured)

In conclusion, understanding Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) is crucial for any business aiming to expand its operations or introduce new products and services. By utilising these market analysis metrics, entrepreneurs and decision-makers can make informed choices, allocate resources effectively, and set realistic goals for sustainable growth.