How To Analyze The Market Size Of TAM, SAM, And SOM ?
TAM, SAM, SOM Technique Carrying out an initial market study before starting any project is extremely important. Without going any further, according to a survey by the Hinge Research Institute, 43% of ventures do not achieve success due to errors made during the hypothesis of the business and market opportunities.
Likewise, market studies significantly improve the decision-making process. Companies that use them grow 27.9% more and obtain 8.9% more profitability.
One of the most valuable and used tools when starting a startup or business to estimate the opportunities offered by the market is the Tam Sam Som technique.
How Does The TAM, SAM, SOM Technique Work?
To understand how the Tam Sam Som tool works, you have to decipher the meaning of its acronym. Each of them allows us to discover three different approaches, which will help us assess the market from three fascinating points of view:
- TAM (Total Addressable Market) or total market: The TAM is the total market or the size of our target market. In other words, in this step, the objective is to estimate the volume of annual income generated in the market we want to enter. It will give us a global idea of the possibilities offered by a business or the possibility of scaling it.
- SAM (Serviceable Available Market) or market that we can serve: The SAM is an indicator that aims to determine what part of the market we can cover with the resources and the current production model. Allow us to measure the capacity of our business and estimate the maximum volume of income that we can choose.
- SOM (Serviceable Obtainable Market) or market that we can get: Finally, the SOM allows us to estimate what market volume we can get in the short or medium term. It will enable us to calculate the volume of income that we could obtain during a specific period, typically one year. However, it is vital to make a realistic estimate based on the data obtained in the previous phases.
How To Calculate The TAM, SAM, SOM Technique?
In the present day, that you know what each of these contractions stands for, it is Used. Let’s get down to calculating TAM, SAM, and SOM. To do this, you need to do some advanced market research beforehand, but here are the formulas once you have those numbers:
What is TAM (Total Market)?
The Total Market ( Total Addressable Market, for its acronym in English) or TAM refers to the total market request for a product or service. It is the maximum revenue that a company can generate by selling its product or service in a specific market.
The Total Market is beneficial for companies to estimate a specific market’s growth potential objectively.
How To Calculate The TAM?
The best way to calculate the Total Market is to perform a bottom-up analysis of a sector.
A bottom-up analysis consists of counting the total number of customers in a marketplace. And also multiplying that number by the average yearly revenue of each customer in that market.
What is SAM (Available Market)?
Outstanding the limitations of your business model (such as specialization or geographical difficulties), likely, you will not be able to sell to the entire Available Market or SAM ( Serviceable Available Market, for its acronym in English).
How To Calculate The SAM?
To calculate your Available Market, And also count all the potential customers that could fit your business and multiply that number by the average annual profits of these customers in your market.
Next, And also multiply your Market Share from the previous year by the Available Market (SAM). Of your sector this year, and you will have the SOM.
The Available Market is more beneficial for companies to objectively estimate. The part of the market that they can “attack” to determine their objectives.
What Is SOM (Target Market)?
Unless you are a monopoly, you cannot capture 100% of your Available Market (SAM). Even if you individual have one competitor, And also it would still be challenging to convince an entire market only to buy your product or service.
It is crucial to measure your Target Market (SOM or Serviceable Obtainable Market for its acronym in English). To determine how many customers would benefit from purchasing your product or service.
The Target Market (SOM) is instrumental for companies to determine their short-term growth objectives.
How To Calculate The SOM?
Divide your income from the previous year by your sector’s Available Market (SAM) for the same period. This percentage is your Market Share of the prior year.
Remember that these figures will essentially be estimates to help decide your strategy. The more you study the market and the more historical data you accumulate. The more accurate your planning will be.