Calculating TAM SAM SOM: Understanding Market Size For Your Business
By Storeplum Editorial
Posted | 8 min read
How to do tam sam som?
Have you ever wondered how much potential market is available for your product and whether it will be profitable from day 1? This article is written for readers who are directly selling their products to consumers, often termed as D2C.
Market size refers to the number of customers who might buy your product. Before launching your startup, it’s a good idea to get an estimate of how many people could buy your product, and whether or not there’s enough demand to support your planned sales volume.
In this guide, you will see how to find market size for a product that you want to sell online- indirectly paving the path for your startup success.
Table of contents
Why is finding the right market size important?
When you're trying to sell a product online, it's important to know what the demand for that product is. If there's not enough demand, then it can be hard to make money and you could even lose money if your inventory costs too much.
On the other hand, if there's too much demand (more than you can handle) then your sales will suffer because you won't be able to fulfill all of your orders.
The good news is that it's possible to figure out exactly how many people might want to buy your product. In fact, Google Trends make it a bit easy for you. Here is a trick to get a rough idea to find out the right market size for your product:
Go to Google Trends and search for a description of your product. For example, "trendy clothes" or "fast food restaurant market"
You'll see a chart showing how many people have searched for that term over time. You can change the settings at the top of the page (under "show search volume") to show searches from specific countries or regions of the world, which can be helpful if you're only interested in selling in one place.
Is market potential too big or too small?
Calculating the market size of a particular niche is essential to deciding whether you have a viable business idea on your hands. If your niche is too small, there won't be enough customers to make your business successful.
A good rule of thumb is that you need at least 1,000 potential customers in your target market who will spend money with you or subscribe to your service. If your potential customer base is smaller than this, you'll probably have a hard time growing.
So how do you know if the niche you're thinking about jumping into is too big? The way you can tell is by looking at the number of competitors in the market. If there are more than 10,000 competing companies in the space, then it's time to consider something else.
Those numbers aren't etched in stone and you may be able to easily stand out without doing anything special in terms of branding or marketing if there are less.
Metrics like tam sam som can be helpful in identifying opportunities and assessing whether a business has the resources to pursue them. They can also be useful in defining target markets, market analysis and determining how to best allocate marketing resources.
Understanding Total Addressable Market (TAM)
The total addressable market, or the acronym TAM, is the total revenue opportunity for your product. It is a key metric used by businesses to determine if the market size is large enough to justify the resources (time, money, people) required to capture that opportunity.
Total Addressable Market (TAM) = Number of potential users who can buy your product X Maximum product price.
The TAM is typically expressed as a dollar amount or an estimate of the number of customers. Sometimes, it is also referred as just total market.
For example, let’s say you are planning to start an ecommerce website for a new category of shoes and slip-ons named “Healing Shoes” that helps people with wide feet and arthritis to walk and jog without any pain. You believe that these shoes would be valuable to people over 40 with knee pains and arthritis. If you calculated that there are 10,000,000 such people in US and that they spend an average of $40 annually on such solutions, then your TAM would be $400 million ($10m x 40)
While it may seem straightforward to calculate TAM, it’s often more complicated than it seems on the surface.
You need to make a lot of assumptions about how large the market is now and how it will grow in the future. You also need to make assumptions about how much of that market you can potentially capture with your product (see below).
A thumb rule is to rely on thorough market research to make sure that the assumptions are not way off than reality.
The total addressable market (TAM) is a metric that prospective investors can use to gauge a company's potential growth. It takes into account all segments of the market that a company could potentially tap into with its current product portfolio and business model.
It is the basic building block while writing a detailed business plan for your product. Check out the below template to get a rough idea on calculating TAM.
If it is almost impossible to capture 100% of a TAM, then why is it included in almost every pitch deck of a product or service?
There are a few reasons why the total available market (TAM) is still included in most pitch decks, even though it may be difficult to obtain an accurate estimate.
First, the TAM provides a helpful way to think about the potential size of a market.
Second, TAM can be used as a tool to help identify potential target markets.
Finally, even if the TAM is not perfectly accurate, it can still provide valuable insights into the potential size and growth of a market. That is why there are other metrics like sam and som.
Understanding Serviceable Available Market (SAM)
A serviceable available market (SAM) is the total amount of a product or service that can be sold to targeted customers. This is different from the total addressable market, which may also include different portion of the market like potential customers who wouldn't purchase your product or service.
Serviceable available market (SAM) = Targeted segment TAM X Maximum product price.
It's important to understand what your SAM is because your product won't sell if potential customers aren't aware of it, don't want it or can't afford it.
Your serviceable addressable market (SAM) is the size of the market that your company can actually serve. In other words, it’s the maximum potential revenue your company can generate.
SAM is a function of multiple factors, including:
The number of potential customers
This is a function of population and income levels. If we continue with our example of “Healing Shoes” your SAM will be very different if you're in New York than if you're in a local market of a lower-income country like Zambia.
Your SAM is limited by the channels that you can use to reach customers and by your ability to meet their demands. For example, if you depend on distributors and they won't serve a particular geographical region or type of customer, then those people are out of your SAM equation.
Understanding Serviceable Obtainable Market (SOM)
A serviceable obtainable market (SOM) is a market that is both accessible and able to be serviced. This type of market is important for businesses to consider when expanding their operations, as it ensures that there is both a demand for their products or services and that they will be able to reach and serve potential customers.
Serviceable obtainable market (SOM) = Revenue of previous year X SAM for this year.
To assess whether a market is SOM, businesses need to consider factors such as the size of the population, the level of economic development, infrastructure, and regulations.
In an ideal world, you’d like to capture 100 percent of the market share for your product. But that is rarely the case. SOM or serviceable obtainable market determines how many customers you can realistically obtain with your current GTM or go to market strategies. SOM is most useful to determine short term business targets.
Simply put, it is calculated as a multiplication of last year’s market share with this year’s SAM.
As a matter of fact, all of these numbers- TAM, SAM, SOM will be an estimates which help you in building a solid strategy for your business.
Your success in building the strategy largely depends on what factors you consider in calculating the size of the market.
Chances of coming up with accurate estimates is directly related to the amount of research you do in understanding your target market and the market demand for a product.
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