Whether you are an established company or a startup, understanding that your target market goes beyond just the total number of potential customers is important.
Instead of looking at such a broad view of the number of people who want your brand’s products and services, it is much better to consider different aspects of your unique niche and any untapped potential within certain market segments.
Taking the time to do this right away can help you secure things like better financingMore investment opportunities, more opportunity for long-term growth.
Are you ready to learn how TAM, SAM, and SOM can help you determine the market size of your business? Let’s go.
What is TAM (Total Addressable Market)?
One of the first metrics you need to recognize is the total addressable market (TAM).
Also referred to as the total accessible market, This abbreviation refers to the total market demand for a particular product, service or good.
When looking at TAM, it is important to realize that not everyone within this sector will become your customer.
Instead, it gives you an idea of whether there is room for growth and if it is possible to have many competitors in the same niche.
In fact, when most brands look at market size, they generally refer to TAM as a broader view of the scope of the industry as a whole.
TAM numbers also ignore elements such as competition, production issues, and logistical problems.
Instead, look at the exact number of people in your target market and calculate that number as a larger segment of the total population.
Examples of TAME
When looking at TAM, it’s important to remember that this is a larger number that includes all potential customers or customers as a whole.
Here are some examples that illustrate TAM:
- If you sell children’s products, the number of families with children under the age of one.
- For pizzerias, the total population of the area who enjoys this type of cuisine.
- With toy dog manufacturers, the number of people who own dogs.
- For brands that make specific tools for manufacturing, the total number of companies within the B2B market that use these items.
- A landscape company may consider 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 certain category based on data criteria.
And how do brands find this kind of information?
Using basic market research, such as the total number of property owners in a given area, vehicle owners, or any other demographic information about your target customers, you can easily come up with potential ideas for TAM.
What is SAM (Serviceable Addressable Market)?
In contrast, the serviceable market (SAM) is the portion of the existing total market for which your business can offer goods or services.
Most investors care more about SAM, such as It only shows the percentage of TAM that you can reasonably serve.
The elements that contribute to SAM include operating location, economic position, market competition, and anything else that helps reduce and improve the total number of potential customers into a manageable segment.
Even the resources you have in shipping or providing services in a particular region can affect your serviceable market accounts.
There are thousands of factors that can affect SAM, but It is important to choose the elements that make the most sense in your field.
Likewise, figuring out your company’s SAM system is important, as it helps eliminate any potentially irrelevant combinations or factors based on your current business model.
Unlike TAM, the SAM discovery process for your brand involves making sure that you include only customers that you can realistically serve.
Some examples include:
- A local restaurant with one location and the total number of people staying 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, it is the number of companies within the United States that have a necessary need for the part of the manufacturing that your company manufactures.
Another important thing to remember about SAM is that It takes into account any major competition, too.
For example, if you are facing a large retailer, it is realistic to reduce your SAM by a few percentage points to accommodate customers who will buy from your competition.
What is SOM (Serviceable Market)?
Finally, there is the term Available Service Market (SOM).
This is where you really look and Determine the most suitable segment of the market as a whole If they all buy your product or demand your service.
The SOM is a good number to look at, because it is already making a more reasonable attempt to determine what is possible in terms of sales.
Not only is this important from an investment point of view, but it also helps you create traditional and digital marketing goals to accommodate these numbers.
It is also necessary to consider the SOM to process the existing production or scheduling capacity for your work.
If this severely limits your service market, it is a good idea to consider increasing your production capabilities or even hiring more staff to more adequately meet the needs.
Examples of SO
When it comes to looking at examples of SOM, it is important to note that the number can range widely from one company to another.
Again, this is a more accurate number than TAM and SAM, because it takes into account the needs, capabilities, and competitive position of your company over others.
Examples of SOM include:
- If your company owns 3% of the local market share for carpet cleaning services.
- Your plumbing business can only serve 300 clients a year due to its staffing capabilities.
- There are 900 residents in your local area who can become patrons at this locally owned steakhouse.
- Your company can produce 5,000 machine parts per week to ship to 300 different B2B clients.
See how these numbers are improved a lot more than the other two categories?
These very specific bits of information are a big part of the reason A SOM account is very important to your company and overall growth as an organization.
Why is it important to know your market size?
So why is it important to know your market size?
It is really about understanding what the possibilities are in your industry and whether there is an actual need and/or want for the products and services that your company offers.
Understanding TAM, SAM, and SOM also helps potential investors see it Where your brand fits into the market as a whole, plus any potential for growth or challenges along the way.
While it is great to guess where your brand fits in with competitors in terms of market share, by taking the time to calculate these numbers, you can gain insight into where your company fits in in the overall market.
Finally, market size is fundamental to your overall growth.
After all, if you know what the prospects are for expanding into new markets or even within your existing regional area, you can make better decisions.
How do you calculate TAM, SAM, and SOM?
The process of calculating TAM, SAM, and SOM is fairly easy – if you have a basic understanding of the different formulas involved.
To calculate TAM, multiply the total number of customers within the market by the average number of sales.
If you don’t know this information, you can use market research to make a guess based on the published numbers.
Remember that TAM is the big picture number, which means it’s supposed to be a big number.
To calculate the SAM, you will multiply the number of customers you can serve in your specific area by the average customer value.
This is a good way to find out where your company is in the specific market with your specific business model.
Finally, the formula for calculating SOM is to multiply last year’s market share by this year’s SAM.
This should give you a more specific idea of what the approximate segment of the market is in your area – which then gives you the ability to find areas to make changes to operations, marketing, etc.
Conclusion: Understand Volume Marketing Using 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 too Identify areas where you may 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 toward growth.
Speaking of growth, did you know that online marketing is one of the best ways to ensure the success of your business and brand?
In our blog post, learn more about marketing And how you can use it to fuel your business!