TAM SAM SOM: Define Customer & Revenue Opportunities
The acronyms TAM SAM SOM — which stand for Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market, respectively — are well-known in the sales world.
These terms represent metrics that help businesses define the customer and revenue opportunities within their market.
The TAM SAM SOM metrics also provide important information for investors. This information helps potential investors evaluate the potential upside of a business (SAM), while mitigating the risk (SOM).
In this article, we’ll look more closely at TAM SAM SOM including how to calculate them, why they’re important, and examples of each.
Here’s what we’ll cover:
- What Is TAM SAM SOM?
- Why Is TAM SAM SOM Important?
- How to Calculate TAM SAM SOM
- How to Maximize SOM
- Examples of TAM SAM SOM
- How to Include TAM SAM SOM in Your Business Plan
- Why TAM SAM SOM Is Important for Investors
What is TAM SAM SOM?
The acronyms TAM, SAM, and SOM deal with a business’s market size and accessibility.
TAM (Total Addressable Market)
The first and broadest of the three metrics is TAM, which stands for Total Addressable Market (sometimes Total Available Market). TAM represents the absolute maximum market size or potential revenue that a business can generate with their product or service.
TAM does not take into account competition, geographical boundaries, marketing budgets, or any other market-narrowing constraints.
SAM (Serviceable Addressable Market)
Next is SAM, which stands for Serviceable Addressable Market (sometimes Serviceable Available Market). SAM is a subset of the Total Addressable Market, defined by the demographics of your product niche. The Serviceable Addressable Market shows how big of a market segment exists that can be served by your product and business model.
A basic example will help highlight the difference here. For an entrepreneur hoping to open a donut shop, their TAM would be everyone who has an interest in visiting a shop that sells baked goods or sweet treats. The SAM for this business is represented by everyone who wants donuts, specifically.
SOM (Serviceable Obtainable Market)
The last metric to take into account is the SOM. SOM stands for Serviceable Obtainable Market, and it provides a realistic look at what share of market a business can reasonably capture in the next 3 – 5 years. To calculate the SOM, businesses need to account for competition, marketing strategies, pricing plans, and many other variables.
Tip: Here is how MIDiA breaks it down: “TAM is how big the pond you are fishing in is, SAM is how many fish there are in the pond, and SOM is how many fish you are likely to catch.”
Accurate TAM SAM SOM is necessary for sales forecasts, investor relationships, and resource management.
Why Is TAM SAM SOM Important?
Accurate market size metrics are important for a well-developed business plan. TAM SAM SOM helps startups and enterprise companies alike evaluate the viability of their product, and gives them the ability to solicit investors with a high degree of confidence in return.
There are other benefits to calculating these metrics, too. TAM, for example, helps businesses determine the competitiveness of their product and the extent of any untapped customer segments.
SAM helps a business hone in on their niche and plan medium-term goals.
SOM provides an opportunity for investors to mitigate risk. When calculated correctly, it provides investors and businesses with a “worst-case scenario,” in which they only successfully reach a small portion of the TAM. The TAM, on the other hand, provides the upside.
Of the three, accurately calculating SOM is most important. It proves your business case and demonstrates an ability to pinpoint and service the target market. If there turns out to be a mismatch between the SOM prediction and reality, it can lead investors to doubt a business’s capability to expand.Target your best buyersIdentify what's working in your sales process and who's interested in your offering
Calculating TAM SAM SOM
Fortunately, there are easy-to-follow formulas for calculating each of these metrics. There is some legwork involved in the process (the TAM formula, for example, requires that teams do significant research), but the effort is well worth it.
How to Calculate TAM
To calculate TAM, multiply the total number of accounts in your market by the annual contract value of those accounts.
There are two ways to determine the total number of accounts. A top-down approach relies on published market analysis from sources like Forrester and Gartner to estimate the size of the target market.
A bottom-up analysis, which uses primary market research, is generally considered more reliable.
Realistically, though, no company will ever win 100% of their TAM. That’s why businesses calculate SAM.
How to Calculate SAM
To calculate SAM, use the following formula:
SAM is a very important metric. A sizable TAM means nothing if you don’t have medium- to long-term plans for consistently increasing your SAM.
The last piece of the market puzzle is SOM. A business’s SOM is a realistic, short-term look at how much of the market share they can expect to capture. It accounts for competition, pricing discrepancies, and other market-narrowing factors.
How to Calculate SOM
To calculate SOM, use the following formula:
Again, it’s crucial that this figure is accurate. SOM acts as a litmus test for investors determining whether or not they can trust your business plan — if you can’t execute your sales plan on a well-defined fraction of the market, why should they expect you to do so on a larger scale?
How to Maximize SOM
Although large TAM figures can seem impressive, the best business opportunities for investors are often those with hefty SOM predictions. Maximizing SOM goes hand-in-hand with maximizing profitability.
Here are some ways to increase your SOM predictions, no matter your current stage of business development.
Define Your USP
The more you can define your unique selling proposition and value proposition, the more able your marketing and sales teams will be to address a larger SOM.
A well-defined USP helps you stand out from competitors, and can even sometimes override other market constraints like geographical boundaries or budget concerns.
Outprice Your Competition
Another effective strategy for increasing your SOM is to do everything you can to compete on price.
The more value you can offer at a lower price, the more likely you are to capture a bigger market share.
Outstanding Customer Service
Customers expect a personalized solution to their problems. That is, after all, the dream that most salespeople sell during the buying process.
It’s important that salespeople and/or the customer success team stay diligent in ensuring the customer feels heard, valued, and helped long after they sign a contract. Businesses should invest as much into customer success as they do into the pre-purchase stage.
Examples of TAM SAM SOM
The concept of TAM SAM SOM can be hard to visualize in the abstract. Let’s look at a couple of concrete, hypothetical examples to help illustrate these important metrics.
A sushi restaurant’s TAM would be all restaurants. With no constraining factors like geography, customer preference, production capacity, or price range, this sushi restaurant could presumably serve any customer who’s in the market to eat at a restaurant.
The SAM would be represented by those who prefer to eat at restaurants that serve Asian food (perhaps even sushi, specifically, as this is a sub-niche market) and who live within a certain radius of this particular restaurant.
The SOM for this sushi restaurant would be the customers who are willing to pay according to the price range of the menu, and who prefer the type of atmosphere the restaurant offers. Even with those constraints, though, this sushi restaurant likely won’t capture that full population. SOM should also account for the number, proximity, and success of competitors.
Let’s look at a software company, where geographical constraints are less of a factor in determining market size. In our example, the company’s service is a mobile sales enablement platform that helps salespeople manage their sales collateral on their mobile devices.
The TAM for this case would be the entire sales enablement market.
The software platform in this example is built specifically for mobile devices, so that factor defines the SAM.
Finally, the software is designed for companies with 50 – 100 employees. This narrows the market down to the niche that defines the SOM.
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How to Include TAM SAM SOM in Your Business Plan
The TAM, SAM, and SOM metrics aren’t just calculated as part of your run-of-the-mill sales metrics. They’re actually critically important to the very foundation of your business model and should be key components of your business plan.
How successful (and profitable) your business will be ultimately depends on the conditions of the market. Calculating TAM, SAM, and SOM in your business plan demonstrates to your team and investors that you have a thorough understanding of the size of the market, the potential opportunities available to your business within that market, and the strategies you will execute to maximize those opportunities.
Aside from the raw numbers (which will be determined by calculating TAM, SAM, and SOM), your business plan can also address these metrics by including information about:
- Your company’s unique selling points
- Competitive pricing strategy
- Location and territory strategy
- A plan to personalize your offers
- Customer service
Each of these components has a direct impact on TAM, SAM, and SOM, and will add to a clear picture of the feasibility of your business idea.
Specifically, TAM, SAM, and SOM should be included in your business plan to demonstrate the following:
- TAM: estimates a specific market’s potential for growth
- SAM: estimates the subset of the market a business could potentially capture
- SOM: estimates how much of the SAM a business can capture in the short-term
Each of these components will act as a foundational building block for the rest of your business plan.
Why TAM SAM SOM Is Important for Investors
Your business plan exists as much for investors as it does for your internal organization. It helps persuade them that your vision and plan for execution are solid; TAM, SAM, and SOM provide the hard data to back it up.
When investors venture into a new business opportunity, they’re looking at two critical factors:
- Is the investment low-risk, with an early entry?
- Is there enough upside to make the investment worth it?
TAM, SAM, and SOM speak to both of those concerns. SAM and SOM offer investors the specific low-risk conditions they’re looking for, and TAM addresses the potential upside.
Don’t fall into the trap of thinking any of the three is more important than the other when it comes to investors. Although many investors will focus heavily on SOM — after all, they’ll want to make sure they start seeing an immediate return, even if it’s a small one — SAM and TAM also play important roles in helping investors see the bigger picture.
SAM helps investors envision how you plan to position your company against competitors. It demonstrates that you have a firm understanding of your niche and USPs, and how you’ll stand out from the crowd.
Thinking even bigger picture, TAM helps investors see the hypothetical maximum growth, should your business plan come to fruition. It paints the picture of what their returns could potentially look like after the startup phase.
If you’re able to demonstrate, very specifically, how you’re going to achieve your SOM returns, and you can also indicate a lucrative TAM, it’s likely that investors will be eager to work with you.
Have you defined TAM SAM SOM in your business plan? How well did they measure up to your actual annual revenue? Is it time to re-evaluate the market potential or the portion of the market you’re prepared to capture in the medium term?
Feel free to use the formulas provided in the templates in this article to get you started on the process.
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