When it comes to formulating exactly how to target your market for products and services, one of the best means of doing so is using TAM SAM SOM analysis. This article will break down these terms and how they can help your business.
What is Market Sizing
Before discussing the definitions of TAM, SAM, and SOM as frameworks in business and marketing, it is first important to understand what market sizing is. Market sizing is the process of estimating the size of a potential market for your products or services. If you can accurately size the market, it can help you assess your potential profit for a specific product or service. This helps you make better decisions about your product launches, as well as how to enter new markets and improve your current strategies. TAM SAM SOM is a great framework to help you find your potential market size.
TAM SAM SOM
Now that we understand market sizing, we can dive into the framework for estimating a potential market size. Each of these phrases is a separate acronym, used in conjunction with each other to operate as a larger system of market sizing.
TAM
TAM stands for total available market (or total addressable market). This is the total market demand for a product or service, assuming no other limitations, such as geography, distribution, or price. Generally speaking, TAM is the unfiltered, highest potential of your market opportunity.
SAM
SAM stands for serviceable available market. This is a small section of the TAM, specifically one that is most realistic for a business to target or serve. Unlike TAM, SAM takes limitations like geography, pricing, and distribution into consideration. Generally, SAM narrows the TAM down into the realistic spaces you can effectively target.
SOM
SOM, or serviceable obtainable market, is the even smaller portion of SAM that is made up of what a business can realistically capture or gain. Specifically, the customers and clients that a business is able to acquire in a certain area under certain limitations, such as the marketing and sales ability of a given company, as well as market saturation and the amount of competition you may encounter. Ultimately, SOM focuses your SAM down to what you can feasibly achieve in a given period of time.
TAM SAM SOM for Market Sizing
So, how do you conduct a market sizing analysis using TAM SAM SOM? Here are the best six steps to take to set your business up for success in marketing:
- Defining the Market: Make sure you know the nature of the market you are analyzing. This might take the form of a specific category of product or service. No matter what, make sure you have clearly defined parameters for your analysis.
- Calculate the TAM: Estimate your total addressable market to get started. Make sure you account for all of the total demand for a product across the entire market; this means you will have to identify all potential customers across demographics and any other factors, including their current engagement with or use of similar products.
- Calculate the SAM: Determine your serviceable available market and estimate the realistic amount of your SAM that you can serve. Don’t aim too high; be realistic based on your business’s resources and capabilities.
- Calculate the SOM: Assess your serviceable obtainable market to find what portion of the SAM your business can realistically win over. This is the number of potential clients or customers who might actually purchase from your company. Make sure you are factoring in your competition, market share, and your sales strategies.
- Analyze Your Data: After calculating your SOM, make sure you review your data to see if you can find any market trends or discover any new growth opportunities that you may have missed. You should always be searching for ways to improve your strategies.
- Formulate New Strategies: With the new insight you gain from your data analysis, you can grow your market share and even increase your SOM. Increasing your SOM might eventually lead to improving your SAM and TAM as well. These increases, in turn, can further expand your SOM.
Benefits of TAM SAM SOM
TAM, SAM, and SOM are important concepts in market sizing that help businesses separate out their marketing targets and really fine-tune their strategies for reaching certain groups. They can offer many other kinds of benefits as well, all centered around these means of achieving business goals.
Understand Market Potential
When businesses estimate total market demand, it helps them fully comprehend the potential of their market and how their business can grow. It can offer a new perspective on goals to achieve as a business continues to grow.
Identifying Target Markets
When a company works on estimating its SAM, it can learn about the markets it is best positioned to serve effectively. This can involve certain factors like geography and pricing.
When a business estimates its SOM, it can also interpret the realistic SAM percentage it can capture. This helps a company set realistic and achievable goals, as well as gain a better idea of what kinds of marketing strategies to focus on.
Informed Business Decisions
A TAM SAM SOM analysis offers businesses a way to make informed decisions about their marketing strategies and goals, product and service pricing, and product development projects.
All of these concepts help pave the way for a business to make strong strategic decisions so it can focus its efforts on places where it is most likely to thrive. This can help enhance a business’s return on investment (ROI) and drive growth in a new and effective way.
TAM SAM SOM and Strategy
An analysis of TAM SAM SOM data can help a company make strong strategic decisions for its marketing and growth. Here are just some of the strategic initiatives that can come from a strong TAM SAM SOM analysis:
- Growth Opportunities: By understanding its TAM SAM SOM, a business can learn exactly how to grow its market share and even expand its customer base across a given market.
- Optimized Resource Allocation: A TAM SAM SOM analysis can help businesses allocate resources like their marketing and sales budgets. This can help a company maximize its ROI.
- Marketing and Sales Tactics: Targeted marketing and sales tactics can help a company reach its ideal customer base with ease and expand to reach more interested demographics.
- Market and Product Viability: An analysis can help a business determine whether a new market or product is financially viable. This can save the company money by preventing them from unsuccessful endeavors and identifying projects with the most potential.
TAM SAM SOM FAQs
Here are just a few of the most common questions that businesses may be looking to answer through a TAM SAM SOM analysis:
- What is the total size of the market for a specific product or service? (TAM)
- What is the size of the market that our business can realistically serve? (SAM)
- What is the size of the market that our business can reasonably capture? (SOM)
- What parts of the market are most likely to buy our product or service?
- How do we create strategies to engage with our targeted segments?
- What growth opportunities are there in our targeted segments?
- What resources will help us capture more of the target market?
- What is our business’s viability in the long term?
Calculating TAM SAM SOM
Let’s briefly unpack the formulas to calculate TAM SAM SOM for your analyses.
Calculating TAM
Your total addressable market formula is very straightforward:
TAM = (total number of potential customers) x (average annual revenue per customer)
This is done with estimates, so make sure to estimate as accurately as possible the number of potential customers or businesses that could use your product and how much each customer is likely to spend on your product every year.
Calculating SAM
Your serviceable addressable market is a slightly more complex formula, specifically because it is pulling from a formula that has already been calculated.
SAM = (total number of potential customers) x (percentage of customers you can serve) x (average annual revenue per customer)
As you can see, it is similar to the TAM formula but doesn’t use estimates. Instead, it is based on strict evidence with data to support it.
Calculating SOM
SOM = (total number of potential customers) x (percentage of customers you can serve) x (percentage of capturable market) x (average annual revenue per customer)
TAM SAM SOM Calculations
If you need assistance with your market sizing or TAM SAM SOM analysis, contact our team at SEO Design Chicago. We can help bring your marketing strategies to life.
Contact Us today!