What Do They Imply & How Do You Calculate Them?

As a marketer, I typically discover myself sitting down at my desk with a calculator to do some fundamental math. And more often than not, I’m in a kerfuffle with three acronyms: TAM SAM SOM.

Calculating your whole addressable market (TAM), serviceable addressable market (SAM), and serviceable obtainable market (SOM) may be useful past the realm of simply advertising and marketing.

Enterprise homeowners can use these calculations to find out the viability of a enterprise. Product groups can validate new product choices. However that’s simply the tip of the iceberg in relation to the potential of the TAM, SAM and SOM trio.

Ignoring these numbers may be detrimental. You would enter a market that doesn’t have a big sufficient market measurement to persuade buyers to again you, or you possibly can set an unrealistic income objective for what you are promoting and burn your workers out.

That can assist you keep away from these points, I’ve put collectively a information that’ll educate you precisely tips on how to calculate your business’s whole addressable market, serviceable addressable market, and share of market.

Desk of Contents

These metrics are key parts of a marketing strategy, notably as you craft your advertising and marketing and gross sales technique, set lifelike income objectives, and select to enter the markets which are price your time and sources.

Earlier than I break down tips on how to use these in what you are promoting, let’s get clear on what TAM, SAM, and SOM are and their relationship with each other.

TAM SAM SOM Definitions

Should you’re new to TAM SAM SOM, it’s simple to really feel such as you took a improper flip someplace and landed in alphabet soup.

However, I need you to know that TAM, SAM, and SOM are merely overlapping metrics that make it simpler to fine-tune your marketing strategy, establish achievable objectives, and perceive the potential income and operational impacts of sure enterprise selections.

So let’s break them down.

TAM (Complete Addressable Market)

TAM Definition: The utmost potential demand of a particular market.

I do know it will possibly look like discovering this data can really feel like an enormous job, so I’ll present you tips on how to calculate TAM beneath.

Within the meantime, to simplify it additional, whole addressable market or TAM refers back to the whole market measurement — extra particularly, the demand for a services or products. It’s the utmost quantity of income a enterprise can generate by promoting its services or products in a particular market.

Complete addressable market is most helpful for companies to objectively estimate a particular market’s potential for progress. This information additionally helps firms work out product market match.

SAM (Serviceable Addressable Market)

SAM Definition: The dimensions of the TAM you’ll be able to fairly goal as you construct your viewers.

Because of the limitations of what you are promoting mannequin, which could embrace your specialization or geographic limitations, amongst different variables, you’ll have a troublesome time servicing your whole addressable market.

SAM is a section of TAM you need to use to establish the addressable potential of a market section, or the quantity you’ll be able to realistically market to, making it simpler to estimate income and viewers targets.

Serviceable addressable market is most helpful for companies to objectively estimate the a part of the market they’ll purchase to determine their targets.

SOM (Serviceable Obtainable Market)

SOM Definition: The dimensions of the SAM you’ll be able to probably convert.

Until you are a monopoly, you almost certainly can’t seize 100% of your serviceable addressable market. Even in case you solely have one competitor, it might nonetheless be extraordinarily troublesome to persuade a whole market to solely purchase your services or products.

That’s why it’s essential to measure your serviceable obtainable market to estimate what number of prospects would realistically profit from shopping for your services or products.

Serviceable obtainable market is most helpful for companies to find out short-term progress targets. It could additionally assist with aggressive consciousness and strategizing.

Why TAM SAM SOM Issues

TAM, SAM, and SOM are important to enterprise technique and progress planning. It is because these metrics present how a lot alternative a selected market holds at each stage of enterprise progress.

TAM SAM SOM can also be helpful as a result of it’s a easy and succinct technique to current the worth of an thought. This information provides groups an thought of the target market and revenue alternatives for a market or area of interest.

These metrics also can assist companies share key insights with buyers if they’re searching for funding. The method makes it simpler to make selections that affect progress.

For instance, say you do not have a transparent image of the appropriate section to your SAM. This might make your serviceable addressable market too huge, which may then affect your SOM.

“In my expertise, these instruments are extraordinarily informative when figuring out tips on how to area of interest. Take the time, and perceive the chance or lack thereof together with your new goal,” says Lori Highby of Keystone Click on.

Highby says as her crew niches additional of their enterprise, they use numbers from market analysis studies from corporations like Gartner, Forrester, and so on. in addition to authorities and commerce associations to calculate TAM, SAM, and SOM. They’ll then “discover out which area of interest is probably the most viable,” says Highby.

Easy methods to Use a TAM, SAM, and SOM for Your Enterprise

I do know that each one this sounds nice, however it may be powerful to grasp tips on how to really do TAM, SAM, and SOM calculations and use the info for what you are promoting. So, let’s break this down into some steps you’ll be able to observe.

Step 1. Outline your market.

Earlier than you are able to do a TAM SAM SOM, it is advisable work out what your market is, and what you’re advertising and marketing — a service, a particular product, or perhaps a class of merchandise.

To calculate this, get as clear and particular as you’ll be able to about your viewers, factoring features like:

Geographic location(s).
Gender.
Age.
Traits.
Drawback your provide solves.

Step 2. Use a TAM calculation to seek out the overall market measurement.

Now, it’s market analysis time — dig in to learn how many potential prospects are on the market and the potential income worth if everybody in that market purchases.

For instance, if I’m ladies between the ages of 25 and 65, I’d need to learn how many ladies match that definition. Then, I’d calculate the potential income if all these hundreds of thousands of ladies purchased your product.

Step 3. Use a SAM calculation to seek out the dimensions of your potential market.

Within the instance above, let’s say I work for a high-end luxurious ladies’s skilled clothes retailer wanting on the U.S. market.

So, I need to discover what number of ladies match the demographic of ages 25 to 65 within the U.S. after which calculate the potential income.

Step 4. Use a SOM calculation to seek out your potential market share.

Folks residing paycheck to paycheck aren’t prone to store my model, and girls who don’t work in places of work or don’t usually attend skilled features are much less prone to be my goal market.

Since my SOM calculation is about estimating the portion of the SAM I can realistically market to, I’d discover it by refining my market by revenue and/or employment. I can then refine it additional by figuring out the portion of that market I’m prone to seize, given the aggressive panorama.

Step 5. Determine alternatives and challenges.

Now that you’ve got the calculation, it’s time to dig into the info and strategize. I’ll begin by asking questions like:

What’s the market doing now?
What do your opponents do properly? Poorly?
Any gaps available in the market?
Are there any segments of the market that aren’t being served?

Then, once I’m armed with solutions, I can take into consideration methods for standing out from the competitors and leaning into my strengths to achieve my market.

TAM, SAM, and SOM Template

Now that you recognize what every of those acronyms is and what they’re used for, let’s get into the nitty-gritty of tips on how to calculate TAM, SOM, and SAM.

Doing so requires superior market analysis forward of time, however listed here are the formulation when you’re in a position to get these figures.

Complete Addressable Market (TAM) Calculation

One of the best ways to calculate whole addressable market is by working a bottom-up evaluation of an business:

Depend the overall variety of prospects in a market.
Determine the common annual income of every buyer on this market.
Multiply the 2 numbers.

TAM is helpful for:

Beginning a brand new enterprise.
Launching a brand new product, service, or product class.
Reviewing market methods.
Revising or revisiting your marketing strategy.
Figuring out alternatives to extend market share.

Instance TAM Calculation

Utilizing our pattern high-end skilled ladies’s attire for this calculation, I realized that the worldwide ladies’s attire market was US$1.002 trillion in 2023 (IMARC group). Assuming progress of three.3% every year, we will estimate that quantity to be $1.035 trillion in 2024.

Professional tip: If you wish to make your life simpler when calculating TAM, use HubSpot’s TAM evaluation template. It utterly demystified the idea for me and helped me perceive not simply tam, but additionally the ACV itself.

Serviceable Addressable Market (SAM) Calculation

To calculate your serviceable addressable market:

Depend up all of the potential prospects that might be an excellent match for what you are promoting.
Discover the common annual income of most of these prospects in your market.
Multiply the 2 numbers.

SAM is helpful for:

Planning new advertising and marketing methods and gross sales ways.
Doing market analysis and aggressive evaluation.
Figuring out product viability.

Instance SAM Calculation

To proceed utilizing our pattern high-end ladies’s skilled attire model, keep in mind we had been ladies ages 25-65. Utilizing information from the newest census, there are 86 million ladies in that vary.

Let’s say that every yr, these 86 million ladies spend $2,000 on common yearly on attire.

86 million x $2,000 = $172 billion SAM

And searching on the numbers, we’re not too far off. The U.S. ladies’s attire market was estimated at $191.4 billion in 2024.

Serviceable Obtainable Market (SOM) Calculation

To calculate your serviceable obtainable market:

Divide your income from final yr by your business’s serviceable addressable market from final yr.
This proportion is your market share from final yr.
Multiply your market share from final yr by your business’s serviceable addressable market from this yr to seek out your new SOM.

SOM is helpful for:

Budgeting for operations and advertising and marketing.
Creating achievable, affordable progress plans.
Growing advertising and marketing and gross sales methods.

Instance SOM Calculation

Now right here’s the place we get extra hypothetical. As a result of the TAM and SAM communicate to whole markets accessible, and SOM speaks to extra lifelike market share, we’re going to make up some numbers.

Our high-end ladies’s skilled attire model has the next value per merchandise however most prospects are probably to purchase fewer items, and we’re prone to have fewer prospects than, say, Walmart.

For the sake of spherical numbers, let’s say:

We have now $500 million in income for final yr.
The $172 billion SAM was 2023 numbers.
The $191.4 billion SAM is the 2024 progress.

Notice: I’m conscious that these numbers characterize unrealistic year-over-year market progress charges — I’m merely offering them for the needs of exhibiting you the calculations in motion.

$500 million / $172 billion 2023 SAM = 0.003% market share

0.003% * $191.4 billion 2024 SAM = $574.2 million

Meaning, primarily based on these utterly fictional numbers that present drastically growing demand, my fictional attire firm can fairly count on 15% progress over final yr.

And if that’s correct, it has important repercussions for budgeting, operations, and manufacturing.

However except there’s one thing drastic occurring within the huge image that lowered spending in 2023 and elevated it in 2024, there’s an excellent probability these numbers aren’t lifelike, so it’s vital to return to the numbers to ensure we’re factoring in issues precisely.

Proper Dimension Your Market Alternatives with TAM, SAM, and SOM

After I began my advertising and marketing, TAM, SAM, and SOM felt like abbreviation-heavy jargon. It was simpler to simply nod alongside and let the numbers go in a single ear and out the opposite.

Nonetheless, in the present day, I do know these numbers matter. I even run the calculations myself!

As you get began, take into account that these figures will largely be estimates to tell your technique. The extra market analysis you do and the extra historic information you construct up, the extra exact your planning will probably be.

Do not simply work out the alternatives in your market. Use your analysis to resolve who you need to goal and the way you propose to have interaction them together with your merchandise. Then, use these templates to make your plans clear.

Editor’s be aware: This publish was initially revealed in March 2019 and has been up to date for comprehensiveness.