TAM SAM SOM: HOW TO CALCULATE YOUR MARKET

The above are frequent questions that you may also have encountered that brings you here. Let’s expand on them in detail in layman’s terms, with illustrations and actual sample calculations.

We’ve helped hundreds of our clients calculate and analyzed their TAM for their business, product, and services. It helps them understand how big their market is, or is there a potential market share waiting for them in their industry line. Most often, if you’re a startup and presenting a pitch deck to potential investors, the TAM is one of the essential keys the investor would be looking to understand the revenue opportunity and to help them decide whether to invest or not to invest.

TAM SAM SOM acronyms and definition

TAM, SAM, and SOM are acronyms that represents different subsets of a market.

TAM or Total Addressable Market is the total market demand for a product or service.
SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.

TAM SAM SOM: Do they matter for a startup?

You are a startup. You are starting your business. You need funding. You want your company to grow. Put yourself in an investor’s shoes. You need to deliver a target return to your own investors which implies both de-risking the investment early (i.e. figuring with the minimum possible of capital if the start-up has a market) and investing in opportunities which offer substantial upside potential (i.e. huge market size).

The SOM and SAM help de-risking the investment while the TAM enables to assess the upside potential. The Serviceable Obtainable Market (SOM) is your short term target and therefore the one that matters the most: if you cannot succeed on a fraction of the local market chances are that you will never capture a large part of the global market.

As an investor, I expect you to have a realistic objective and I will judge you on your ability to deliver that objective.

To be realistic your SOM needs to factor in:

your product: people will want to buy your goods
your marketing plan and the identified distribution channels: you have a clear plan to reach a large portion of your target customers
your SAM and the strength of your competition: chances are that you are not going to take 50% market share within 6 months. Therefore your SOM needs to be a reasonable fraction of your Serviceable Available Market.

For the investor the ability to reach your SOM means that he will not lose his shirt. In that context SAM acts as a good sanity check to assess the likelihood of achieving the market share implied by the Serviceable Obtainable Market and as a proxy for the short term upside potential of your business.

If you can deliver SOM in time then you are capable and credible, and you might be able to increase the market share and reach a more important penetration of the SAM which would deliver a good return on investment.

Let’s dive into more details with actual examples of what the above are and how it applies to a product, service, or business.

So how to calculate TAM SAM SOM to size the market?

Total Addressable Market (TAM)

Total addressable market (TAM), also referred to as total available market, is a form of determining the potential size of a market that enables a business to define the holistic revenue opportunity offered from its product or service. It is an exercise that will shed light towards the level of effort and funding to be put into a new business line, because it provides guidelines about the munificence of its economic potential. Nowadays, a TAM has become an important metric and a more creative process of calculating it has emerged due to the increased speed in which new markets are evolving.

How can I know the total addressable market (TAM) of my product or services? Is there a formula? (TAM SAM SOM)

There is no standard formula for calculating the TAM. It differs from every product, services, and business.

1. Understand your target audience (TAM SAM SOM)

Who are your buyers? Who will use your services? What are their demographics? Who are they? Where are they?

Of course, your target audience are companion animal pet owners who are living in the United States. They either owned a cat or dog pets since your product targets companion animals. So, we have defined your overall target audience–companion animal pet owners living in the United States.

2. Analyze the current statistics of your target market (TAM SAM

Where should I get figures and data? What’s the total number of my target audience? Where are they located? See example below.

Total companion animal (dog or cat) pet owners: 67% of U.S. households, or about 85 million families own a pet, according to the 2019-2020 National Pet Owners Survey conducted by the American Pet Products Association (APPA). Of these, 63.4 million owns a dog and 42.7 million have a cat in their household, however, it is possible that these dog owners also own a cat. Here, we will assume the bigger number, thus, your total target audience is 63.4 million companion animal pet parents.

3. Incorporate your business pricing model (TAM SAM SOM)

Assuming that your MSRP (including landed cost) is $458 per product. Then your TAM value would look like below.

Total Addressable Market (TAM) Value

= Total number of companion animal pet owners in the US * MSRP (including landed cost)

= 63.4 million * $458

= $29 billion

Thus, your TAM value is $29 billion assuming a 100% penetration of your target audience. That is the total revenue or potential market value you are looking for if you owned 100% of the market share.

Serviceable Available Market (SAM)

Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach. It is the segment of your TAM which you can reach or achieve.

Let’s go back to our pet food products. The product marketed here is for high-end or premium pet food products. Thus, we will narrow down the number of the target audience and determine what number or percentage of the total pet owners have a household income of $100,000. They are likely the pet owners that would easily purchase premium products. See below statistics.

In the past 10 years, the share of pet owners with a household income of $100,000 and above ranges from 31% to 40% or an average of 35.5%. We will multiply this percentage to the total number of companion animal pet owners. [Calculation: 63.4 million * 35.5% = 22.50 million]

Serviceable Available Market (SAM) Value

= Total number of companion animal pet owners with HHI of $100,000 in the US * MSRP (including landed cost)

= 22.50 million * $458

= $10 billion

Serviceable Obtainable Market (SOM)

Serviceable Obtainable Market is the subset of your SAM that you will realistically get to use your product. This is effectively your target market that you will initially try to sell to. It should give a more realistic value.

In our example, we already determined the TAM and SAM. However, from market research analysis, it was revealed that those who likely purchase premium products are the Young Boomers, GenX, and Millennials. From analysis and survey, it was calculated that 94% of the total pet owners belong to these generations which translates to a total SOM target audience of 21.10 million.

Serviceable Obtainable Market (SOM) Value

= Total number of Young Boomers, GenX, and Millennials companion animal pet owners with HHI of $100,000 in the US * MSRP (including landed cost)

= 21.1 million * $458

= $9 billion

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What is the actual market size? (TAM SAM SOM)

Market size is the total sales or revenue value generated by existing businesses operating in a specific industry. For example, the pet food production industry in the United States generated a total revenue of $26 billion from more than 1,000 existing companies in 2019.

Do you want more realistic examples? Learn from below actual market sizing and TAM analysis.

Total addressable market (TAM), SAM and SOM:

Market sizing and market trends:

At Mhojhos Research, we deliver outstanding market report results across many industries. Market research is key to a new business becoming a profitable entity. It anticipates and minimizes risk, identifies potential customers and helps ensure success.

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