For businesses aiming to dominate their market, understanding market size is crucial. It's not just about identifying opportunities; it's about knowing where to allocate resources for maximum impact. This is where the TAM-SAM-SOM framework comes in handy. Let's break down these concepts and explain how to calculate them effectively.
Understanding TAM, SAM, and SOM
- Total Addressable Market (TAM)
TAM is the total possible market demand for your product or service. In other words, it's the maximum revenue you could generate if you captured 100% market share.
- Serviceable Available Market (SAM)
SAM is the portion of the TAM that your product or service can realistically serve based on geographical or technical constraints.
- Serviceable Obtainable Market (SOM)
SOM represents the subset of the SAM that you can realistically capture. This is your target market share.
Calculating TAM, SAM, and SOM
- Three Different Ways to Calculate TAM:
- Top-Down Approach:
Start by analyzing the overall industry size using market research data and apply your relevant market share percentage.
- Bottom-Up Approach:
Aggregate data from individual customer segments to estimate potential revenue from each, using secondary research or surveys.
- Value-Theory Approach:
Estimate the value your product provides over existing solutions and use that to define your market.
- Calculating Your SAM:
- Once you have your TAM, refine it by considering the specific markets where your product can be realistically sold.
- For example, if your TAM is $10 billion globally, but your product can only serve customers in North America, your SAM will be smaller.
- Calculating Your SOM:
- From your SAM, identify your achievable market share based on factors like competition, sales channels, and marketing efforts.
- Example Calculation:
If your SAM is $1 billion and your market penetration is 10%, your SOM would be $100 million.
Practical Application Example
Let's consider a fictional SaaS company, "TechMasters," offering workflow automation software.
- TAM:
By analyzing the global workflow automation market, TechMasters estimates the TAM at $20 billion.
- SAM:
TechMasters targets English-speaking markets and SMBs, which account for 25% of the global market, reducing their SAM to $5 billion.
- SOM:
With a conservative market penetration estimate of 5%, TechMasters calculates their SOM at $250 million.
Conclusion
The TAM-SAM-SOM framework is a vital tool for businesses looking to assess their market potential strategically. By understanding these concepts, businesses can set realistic goals, focus on achievable targets, and ultimately increase their chances of dominating their chosen markets.
