Measure Your Market With Metrics: TAM, SAM, SOM
You have a fantastic new company idea; have you ever considered how huge the market could be? Estimating the potential size of the market is essential for any business plan, even though it is impossible to foretell the future. Here we find the inputs for TAM, SAM, and SOM. Gain a deeper understanding of your target market and its potential worth with the help of these indicators.
The Dreamcatcher: TAM (Total Addressable Market)
The Total Addressable Market (TAM) represents the maximum potential market size. It denotes the utmost possible revenue that your product or service could make if it acquired the entire market share. This encompasses all potential customers, irrespective of their financial resources, inclination to make a purchase, or whether your product is suitable for their needs. Theoretical numbers are used to help you visualize the highest possible outcome of your idea.
Calculating the TAM:
TAM = Total Number of Customers in Market * Annual Value per Customer
Example: You are addressing the shoe market of India 140 million customers at ACV of $40, t
hen TAM would be 140M * $40 = $5600 Million
Slicing the Pie: SAM (Serviceable Addressable Market)
A more sensible portion of the TAM is the Serviceable Addressable Market (SAM). It shows the percentage of the market as a whole that you can actually service and reach with your offering. It considers the factors like Geographic limitations, Pricing Strategy, Competition and Target Audience.
Calculating the SAM:
SAM = Target Segment of TAM * Annual Value per Customer
Example: Lets say only 10 Million Customers out of 140 Million live in the area that your business serves with an ACV of $40
then SAM would be 10 M * $40 = $400 M
Taking a Bite: SOM (Serviceable Obtainable Market)
When planning your company’s objectives, the Serviceable Obtainable Market (SOM) should be your first priority. It stands for the attainable portion of the SAM that your company can achieve within a given time limit. This takes into account your existing marketing reach, brand recognition, and available resources.
Calculating the SOM:
SOM = Last Year Market Share * This Year SAM
Lets say last year’s $350M and your business earned revenue of $100M as revenue ie, 28.57% . If this year’s SAM is $400M is then multiply with 0.28571 to get this year’s SOM ie $400M *0.28571 = $114.28M
Just a friendly reminder that TAM, SAM, and SOM are not promises but estimations. They are fluid and subject to change as your company develops and the market undergoes transformations. But you can keep your company strategy focused on the best chances by checking these metrics often.
