Understanding the size of the market you are targeting is an important step in building a successful business. One way to do this is to use the TAM, SAM, and SOM principles, which allow you to estimate the total available market, the serviceable available market, and the serviceable obtainable market, respectively. In this article, we are talking about what is TAM, SAM, and SOM and their examples.
TAM, or total available market, refers to the total revenue potential of a product or service in a given market. It is calculated by multiplying the number of potential customers by the average revenue per customer.
For example, let’s say you are starting a company that sells organic snack bars. Your TAM would include the total revenue potential of all organic snack bars sold in your target market, regardless of whether or not they are your brand.
To calculate your TAM, you first need to identify your target market. This could be a specific geographic region, a particular age group, or a specific income level. Once you have identified your target market, you need to determine the total number of potential customers within that market. This can be done through market research, such as conducting surveys or analyzing data from industry sources.
Once you have determined the number of potential customers in your target market, you need to estimate the average revenue per customer. This can be done by looking at the prices of similar products in the market, as well as your own pricing strategy.
To illustrate, let’s say you have identified your target market as young professionals in the United States, and you estimate that there are 50 million potential customers in this market. You also determine that the average price of an organic snack bar is $2, and that the average customer buys 2 snack bars per month. Your TAM would be 50 million potential customers x $2 average revenue per customer x 2 snack bars per customer per month = $200 million.
SAM, or serviceable available market, refers to the portion of the TAM that is realistically attainable by your company. This takes into account factors such as your company’s resources, marketing efforts, and competitive landscape.
To calculate your SAM, you need to consider the following:
- How much of the TAM can you realistically serve given your current resources, such as your production capacity, distribution network, and marketing budget?
- What is the level of demand for your product or service in the market? Are there already similar products or services available, and if so, how successful are they?
- What is your company’s market share in the TAM?
For example, continuing with the organic snack bar example, let’s say you have a production capacity of 1 million snack bars per month and a marketing budget of $100,000 per month. You also estimate that there is moderate demand for organic snack bars in your target market, with similar products achieving a 10% market share. Your SAM would be 1 million snack bars per month x $2 average revenue per snack bar x 10% market share = $20 million.
SOM, or serviceable obtainable market, refers to the portion of the SAM that your company can realistically expect to capture through its marketing efforts. This takes into account factors such as your marketing strategy, sales efforts, and customer loyalty.
To calculate your SOM, you need to consider the following:
- What is your marketing strategy and how effective is it at reaching and converting potential customers?
- What is your sales strategy and how effective is it at closing deals and retaining customers?
- How loyal are your customers, and what is your customer retention rate?
For example, continuing with the organic snack bar example, let’s say you have a well-defined marketing strategy that includes targeted social media campaigns and partnerships with fitness influencers. You also have a strong sales team that is skilled at closing deals and retaining customers. Based on your marketing and sales efforts, you estimate that you will be able to capture 15% of the SAM. Your SOM would be $20 million SAM x 15% = $3 million.
It’s important to note that the TAM, SAM, and SOM estimates are just that – estimates. They are based on assumptions and market research, and as such, are subject to change as market conditions evolve. It’s also important to regularly review and update your estimates as your business grows and changes.
Using diagrams can be a helpful way to visualize the relationships between the TAM, SAM, and SOM. For example, you could create a Venn diagram with the TAM in the center and the SAM and SOM as overlapping circles. This can help you understand the size of the market you are targeting and the portion of that market that is realistically attainable for your business.
In summary, the TAM, SAM, and SOM principles are useful tools for estimating the size of the market you are targeting as a startup. By understanding the total available market, the serviceable available market, and the serviceable obtainable market, you can develop a more realistic and achievable growth plan for your business.
I’m sorry, but I’m not sure what you would like me to continue with. I have provided a detailed explanation of the TAM, SAM, and SOM principles and how they can be used to estimate the size of the market you are targeting as a startup. If you have any specific questions about these concepts or would like further clarification, please let me know and I will do my best to help.
If you’re a startup looking to raise funds, it’s important to have a clear understanding of the size of the market you are targeting. By using the TAM, SAM, and SOM principles, you can estimate the total available market, the serviceable available market, and the serviceable obtainable market, respectively. This can help you develop a more realistic and achievable growth plan for your business.
TAM, SAM, and SOM Examples
Example 1: Online Tutoring Platform
- TAM: The total available market for online tutoring platforms in the United States is $5 billion. This includes all revenue generated by online tutoring platforms, regardless of brand.
- SAM: Your online tutoring platform has a production capacity of 10,000 hours of tutoring per month and a marketing budget of $50,000 per month. You estimate that there is high demand for online tutoring in your target market, with similar platforms achieving a 20% market share. Your SAM is 10,000 hours of tutoring per month x $50 average revenue per hour x 20% market share = $1 million.
- SOM: Your online tutoring platform has a well-defined marketing strategy that includes targeted ads on social media and partnerships with schools and universities. You also have a strong sales team that is skilled at closing deals and retaining customers. Based on your marketing and sales efforts, you estimate that you will be able to capture 30% of the SAM. Your SOM is $1 million SAM x 30% = $300,000.
Example 2: E-Commerce Clothing Store
- TAM: The total available market for e-commerce clothing stores in the United States is $50 billion. This includes all revenue generated by e-commerce clothing stores, regardless of brand.
- SAM: Your e-commerce clothing store has a production capacity of 50,000 units per month and a marketing budget of $100,000 per month. You estimate that there is moderate demand for your products in your target market, with similar stores achieving a 5% market share. Your SAM is 50,000 units per month x $40 average revenue per unit x 5% market share = $1 million.
- SOM: Your e-commerce clothing store has a well-defined marketing strategy that includes targeted ads on social media and partnerships with fashion influencers. You also have a strong sales team that is skilled at closing deals and retaining customers. Based on your marketing and sales efforts, you estimate that you will be able to capture 10% of the SAM. Your SOM is $1 million SAM x 10% = $100,000.
I hope these examples help to illustrate how TAM, SAM, and SOM calculations can be used to estimate the size of the market you are targeting as a startup. Please let me know if you have any questions or need further clarification.
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