Whether you’re an established business or a startup, understanding that your target market goes beyond just the total number of possible customers is important.
Instead of looking at such a broad view of how many people want your brand’s products and services, it is far better to consider varying aspects of your unique niche and any untapped potential within certain segments of the market.
Taking time to do this right away can help you secure things like better funding, more investment opportunities, and a greater chance at long-term growth.
Ready to learn how TAM, SAM, and SOM can help you define the market size of your business? Let’s go.
What is TAM (Total Addressable Market)?
One of the first metrics you need to become familiar with is the total addressable market (TAM).
Also referred to as total accessible market, this acronym refers to the entirety of the market demand for a specific product, service, or commodity.
When looking at TAM, it is important to realize that not everyone within this segment will become your customer.
Instead, it gives you an idea if there’s room for growth and if having numerous competitors within the same niche is possible.
In fact, when most brands look at market size, they’re generally referring to TAM as a wider view of the scope of the industry as a whole.
TAM figures also ignore elements like competition, production issues, and logistics problems.
Instead, look at the exact number of people in your target market and calculate this figure as a larger segment of the overall population.
When looking at TAM, it is important to remember that this is a larger figure that includes all potential customers or clients as a whole.
Here are a few examples that demonstrate TAM:
- If you sell baby products, the number of families with children under the age of one.
- For pizza restaurants, the total population in the area who enjoy this type of cuisine.
- With dog toy manufacturers, the number of people who own canines.
- For brands that make specific widgets for manufacturing, the total number of companies within that B2B marketplace that use those items.
- A landscape company might look at the total number of homeowners who have lawns that need monthly maintenance.
See where we are going with these examples?
They are all very large groups that fall into a specific category based on data criteria.
And how do brands find this type of information?
By using basic market research, such as total number of property owners in a given region, vehicle owners, or whatever other demographics pertain to your target customers, you can easily come up with potential ideas for TAM.
What is SAM (Serviceable Addressable Market)?
In contrast, serviceable addressable market (SAM) is the segment of the current overall market that your business can offer goods or services to.
Most investors care more about SAM, as it demonstrates only the percentage of the TAM that you could reasonably service.
Elements that contribute to SAM include operating location, economic status, market competition, and anything else that helps reduce the total number of potential customers and refine them down to a manageable sector.
Even the resources you have in shipping or offering services in a specific area can affect your serviceable addressable market calculations.
There are literally thousands of factors that can affect SAM, but it is important to choose ones that make the most sense for your industry.
Likewise, figuring out your company’s SAM is important, as it helps eliminate any potential irrelevant groups or factors based on your current business model.
Unlike TAM, the process of figuring out your brand’s SAM involves ensuring you’re only including those customers that you can realistically service.
A few examples include:
- A local restaurant with a single location and the total number of people residing in their same zip code.
- The number of families within a given city that need after-school care from a childcare center.
- In a B2B setting, the number of companies within the United States that have a necessary need for the manufacturing part that your company manufactures.
Another important thing to remember about SAM is that it takes into consideration any major competition, too.
For example, if you’re going up against a major retailer, it is realistic to reduce your SAM by a few percentage points to accommodate those customers who will buy from your competition.
What is SOM (Serviceable Obtainable Market)?
Finally, there’s the term serviceable obtainable market (SOM).
This is where you really dig down and determine what the most appropriate segment of the overall market should be if they were all to purchase your product or request your service.
SOM is a good number to look at, as it really makes a more reasonable attempt at determining what is possible in terms of sales.
Not only is this important from an investment standpoint, but it also helps you create traditional and digital marketing goals to accommodate these figures.
It is also vital to consider SOM to address the current production or scheduling capacity for your business.
If this is severely limiting your serviceable market, then it is a good idea to consider increasing your production capabilities or even hiring more staff to fulfill needs more adequately.
When it comes to looking at SOM examples, it is important to note that the figure can range widely from one business and niche to another.
Again, this is a much more refined figure than TAM and SAM, as it takes into consideration the exact needs, capabilities, and competitive positioning of your company over others.
Examples of SOM include:
- If your company had 3% of the local market share for carpet cleaning services.
- Your plumbing business can only service 300 customers a year due to staffing capabilities.
- There are 900 residents in your local area that could become patrons at your locally-owned steakhouse.
- Your business can produce 5,000 machine parts a week to ship to 300 different B2B customers.
See how these figures are a lot more refined than the other two categories?
These highly specific pieces of information are a big part of why calculating SOM is so important for your company and overall growth as an organization.
Why Is It Important to Know the Size of Your Market?
So, why is knowing the size of your market so important?
It really comes down to understanding what possibilities are out there for your industry and whether there’s an actual need and/or want for the products and services your company provides.
Understanding your TAM, SAM, and SOM also helps potential investors see where in the overall market your brand fits, plus any potential for growth or challenges along the way.
While it is great to guess at where your brand fits in with competitors in terms of market share, by taking the time to calculate these figures, you can glean true insight into where your company fits into the overall marketplace.
And, finally, the size of your market is key to your overall growth.
After all, if you know what the possibilities are for expansion to new markets or even within your existing regional area, then you can make better decisions.
How to Calculate TAM, SAM, and SOM?
The process of calculating TAM, SAM, and SOM is fairly easy — if you have a basic understanding of the various formulas involved.
To calculate TAM, multiple the total number of customers within the marketplace by the average sales figure.
If you don’t know this information, you can use market research to guess based on published figures.
Remember, TAM is the big picture number, which means it is supposed to be a large figure.
For calculating SAM, you’ll multiply the number of customers you’re able to service within your given area by the average customer value.
This is a good way to see where your company fits in the given market with your specific business model.
Finally, the formula to calculate SOM is by multiplying last year’s market share by this year’s SAM.
That should give you a more specific idea of what your approximate piece of the market in your area is — which then gives you the ability to find areas to make changes to operations, marketing, etc.
Wrap Up: Understanding Marketing Size with TAM, SAM, and SOM
Understanding these three concepts in terms of market size is a good way to show investors that your business has potential for growth, while also identifying areas where you might be able to make changes in the future.
By keeping TAM, SAM, and SOM in mind, you can set the right goals and take more proactive steps towards growth.
Speaking of growth, did you know that smarketing is one of the best ways to ensure the success of your business and brand?
In our blog post, learn more about smarketing and how you can use it to fuel your business!