What is the difference between TAM, SAM, and SOM when estimating market size?

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When estimating market size, these three terms help you understand the potential revenue at different levels:

  • TAM (Total Addressable Market): The total revenue opportunity if your product or service captured 100% of the market. It’s the largest possible market size.
  • SAM (Serviceable Available Market): The portion of the TAM that you can realistically target, based on factors like geography or customer segments.
  • SOM (Serviceable Obtainable Market): The share of the SAM that you can actually capture in the short term, considering competition and resources.

For example, if the global smartphone market (TAM) is $500 billion, the European market (SAM) might be $100 billion, and your realistic short-term market share (SOM) could be $2 billion.

 

How would you define and calculate TAM?



A Total Addressable Market (or TAM) is the total demand for your product or service across all potential customers. It represents the maximum revenue opportunity if you captured 100% market share.

To calculate TAM, follow these steps:

  1. Define the target market: Identify the broad market scope, such as a specific geography, industry, or customer segment (e.g., the number of businesses in a country or population in a city).
  2. Estimate the total potential customer base: Use reliable data to determine the number of prospective customers within the defined market.
  3. Estimate the potential spend per customer: This is often measured using the average annual contract value(AACV) or average annual spend per customer.
    • AACV refers to the average yearly revenue generated per customer through contracts or purchases.

Formula:
TAM = [Total Potential Customers] × [Average Annual Contract Value (AACV)]

Example:
If there are 1,000,000 businesses in your target market and the average annual spend (AACV) per customer is $5,000, the TAM would be:
TAM = 1,000,000 × $5,000 = $5 billion.


 

What is a Serviceable Addressable Market (SAM), and how do you calculate it?

 
The Serviceable Addressable Market (SAM) is the portion of your Total Addressable Market (TAM) that you can reasonably expect to reach with your marketing and sales efforts. SAM narrows the TAM to the part of the market that is realistically accessible to your business.

To calculate SAM, follow these steps:

  1. Start with your TAM: Determine the total potential demand for your product.
  2. Identify the percentage of TAM you can reach: Use factors like your competitive advantage, geographic constraints, target demographics, and realistic customer interest.
  3. Refine further based on budget and other constraints: Exclude customers that may not have the resources to purchase your product.

 

What is a Serviceable Obtainable Market (SOM), and how do you calculate it?



The Serviceable Obtainable Market (SOM) is the portion of your Serviceable Addressable Market (SAM) that you can realistically capture with your current resources, such as budget, team, and operational capacity. It represents your short-term market share potential.

To calculate SOM:

  1. Start with your SAM: Identify the portion of TAM that is realistically reachable based on your target customers and market constraints.
  2. Estimate your capture rate: Consider your current resources, competition, and operational limitations to determine the percentage of SAM you can capture.
  3. Refine further with market data: Analyze industry trends, projections, and benchmarks to support your estimate.

Example:
If your SAM includes 100 public schools in the U.S., but with your current resources, you can only capture 0.1%, then your SOM would be:
SOM = 100 × 0.1% = 0.1 schools (or approximately 1 school).

Tip: Looking at industry growth trends can help you estimate how your SOM may expand in the future as your resources grow.





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