TAM, SAM, and SOM: Essential Business Metrics
The market potential of a product or the market potential of a business is important to know when one is putting up a business or developing a product. Three essential metrics can help simplify and quantify this process: Thus, the major market segmentation MAT (Marketable Attractive Triangle) is divided into TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market). These figures are helpful in their clarity but are also used as the basis for organizational planning, presenting business proposals to investors, and planning and considering future expansion.
The following explains what TAM, SAM, and SOM stand for and how they might influence your company choices:
1. TAM: Total Addressable Market
Definition: TAM or Total Available Market, is simply the total revenue opportunity that exists for a given product or service if they could obtain every single customer in a particular market. It is the broadest, most positive definition of the market out there.
Why It’s Important: TAM serves more as a first-cut or radar view and helps you decide if your product is entering a huge market.
How to Calculate TAM:
Top-Down Approach: By assuming and adopting statistics from industry reports or carrying out market research to arrive at a figure for the total market size for the industry.
Bottom-Up Approach: By the use of pricing the estimate could be derived from the price of the product/ service multiplied by the total potential customers in the market.
Value-Theory Approach: Calculating TAM with the help of expected value which might be received from the product of a company.
Example: Your TAM if you are creating a ride-sharing application might be the global transportation sector that includes taxis, buses, trains, and personal automobiles.
2. SAM: Serviceable Available Market
Definition: However, while it covers the complete market, TAM is restricted to the market segment that a company or its product or its service can address as a result of its product offering and the territory it covers.
Why It’s Important: In our view SAM helps to improve the degree of precision with the aid of which the market opportunity appears to be more realistic and well-defined.
How to Calculate SAM:
It is necessary to remove the regions, demographics, or industries that are not accessible for a certain product/service.
Consider the constraints or issues of logistics and operations.
Example: Your SAM for the very same ride-sharing app could be restricted to the urban geographies in a particular country where ride-sharing is popular and legally permitted.
3. SOM: Serviceable Obtainable Market
Definition: SOM represents the portion of SAM that your business is capable of profitable and achieving at a particular period of time depending on the currently available resources, competitors, and market environment.
Why It’s Important: A solid orientation provided by SOM is valuable and simple to use as it can help, and is aimed at reducing the scope of over-optimistic projections while synchronizing them with the company’s members and stakeholders.
How to Calculate SOM:
Evaluate your marketing and sales capability to capture the customers.
Take into consideration your competitor's strengths and weaknesses.
Example: In the first year of the operation of the ride-sharing app, SOM could only represent a minority of urban inhabitants who utilize app-based transportation applications.
Visualizing TAM, SAM, and SOM
Think of these metrics as concentric circles:
TAM is the largest outer circle, which depicts the market with the greatest market coverage.
TAM is a much bigger circle than SAM as the realistic market segment is much less in this case.
Your business can truly capture SOM, which is the smallest circle in SAM.
Why TAM, SAM, and SOM Matter in Business Planning
Investor Confidence: Customers expect the investor to show the total available market, the serviceable available market, and some short-term achievable objectives.
Strategic Focus: These metrics help you to avoid dispersing the chances and resources all around and show you where you should focus.
Market Prioritization: Assists in identifying the right market segments and identifying more profitable customers.
Scalability: It provides a framework for future growth from SOM, to SAM throughout to TAM.
TAM, SAM, SOM in Action: A Startup Example
Imagine you’re launching an online meal delivery service:
TAM: The current value of the global food delivery market is $150 billion.
SAM: Your service is aimed at the USA market, thus limiting the opportunity to $ 30 billion.
SOM: During your first year of operation only you have limited marketing as well as delivery access to the urban cities; for this reason, the approximate projected market share is $ 2 million.
Ideas for Increasing TAM, SAM, and SOM Utilization
Be Data-Driven: When trying to estimate market sizes, the actual numbers collected should be obtained from credible sources.
Stay Realistic: Whereas TAM is based on your optimal level of desire, SOM must be based on your present level of capacity.
Iterate and Update: These metrics are not static. Remember to use them often as your business evolves and the market swings shift.
Conclusion
TAM, SAM, and SOM are significant concepts for any new or existing entrepreneurial individual expecting to achieve success and excel in the competitive world. These metrics make the planning of markets less complicated and keep your business vision both bold and practical. Since its reasoning begins from the strategic to the tactical context, namely, TAM, SAM, and SOM are highly effective in mapping the successful approach in a given field.
This list can also be expanded with the use of other tools, like LeadNear, which can give you precise information about potential clients, improving market segmentation efficacy and helping you determine your precise TAM, SAM, and SOM. LeadNear has a strong criterion for lead generation and lead enrichment; given such tools, it is easier to find and target the right customers, making all used strategies credible.
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