Why do you need a TAM, SAM, SOM?

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As a CEO of a B2B company, you're no stranger to the constant barrage of buzzwords and acronyms that dominate the business world. However, there's a trio of metrics that you simply can't afford to ignore: TAM, SAM, and SOM.

These three acronyms are more than just industry jargon; they're powerful tools that can shape your business strategy, optimize resource allocation, and attract investors. So, let's dive in and answer the burning question: Why do you need a TAM, SAM, SOM?

What is TAM, SAM, SOM?

Understanding market size is crucial for any business or startup looking to evaluate its potential for growth and success. Three key metrics often used to measure market size are TAM, SAM, and SOM. Here’s a breakdown of what each term means:

TAM (Total Addressable Market)

TAM represents the total revenue opportunity available if your product or service achieved 100% market share. It's the big picture, the total universe of potential customers – the maximum potential in the market. Understanding TAM is crucial because it helps you comprehend the full scope of the opportunity in your industry.

SAM (Serviceable Available Market)

SAM narrows down the TAM to the portion of the market that your company’s products or services can serve. It's the segment of the TAM that is within your reach, considering your business model, geographic limitations, and other constraints. Knowing your SAM helps you focus on the most relevant market segments.

SOM (Serviceable Obtainable Market)

SOM is the portion of the SAM that you can realistically capture. It's the target market that you can serve, given your current resources, capabilities, and competition. This metric is essential for setting realistic sales targets and growth strategies.

Why should CEOs care about TAM, SAM, SOM?

You need a clear understanding of their market potential to make informed strategic decisions for your business. Knowing the differences between your TAM, SAM, and SOM can help you accurately gauge market opportunities, prioritize resources, and plan for sustainable growth.

Strategic planning

Understanding TAM, SAM, and SOM is fundamental for effective strategic planning. These metrics provide a clear picture of the market landscape, helping you identify opportunities and threats.

For example, if your TAM is enormous but your SOM is relatively small, it might indicate untapped potential or the need for strategic pivots. By incorporating these metrics into your planning, you can make informed decisions that drive long-term growth.

Resource allocation

Properly calculated TAM, SAM, and SOM help you allocate resources more efficiently. Knowing where your potential customers are and what share of the market you can realistically capture allows you to prioritize investments in marketing, sales, and product development.

For instance, focusing your efforts on the SAM rather than the entire TAM can prevent wasted resources on unattainable market segments.

Investor relations

Investors want to see a clear path to growth and profitability, and TAM, SAM, SOM are critical in painting that picture. These metrics demonstrate that you have a deep understanding of your market and a realistic plan for capturing it. Including them in your pitches and business plans can significantly enhance your credibility and attractiveness to investors.

How to determine your TAM, SAM, SOM

Accurately calculating TAM, SAM, and SOM is essential for developing a robust market strategy. By following these practical steps, you can quantify your market opportunities and make data-driven decisions to maximize your growth.

1. Identifying the TAM

Start by researching the total market demand for your product or service.
Use industry reports, market research, and competitive analysis to gather data.
Calculate TAM by estimating the total revenue potential if you achieved 100% market share.

2. Narrowing down to the SAM

Define your target market within the TAM based on your business model.
Consider factors like geographic reach, regulatory constraints, and target customer segments.
Calculate SAM by focusing on the portion of the TAM that you can realistically serve.

3. Determining your SOM

Assess your current capabilities, resources, and competitive position.
Estimate the market share you can realistically capture within your SAM.
Calculate SOM by setting realistic targets based on your analysis.

4. Leveraging tools and resources

Don’t forget about the tools and resources available to you. Utilize market research reports from sources like IBISWorld, Statista, or Gartner. Leverage tools like Excel for calculations and CRM software for data tracking. Consider consulting with market research firms or using software like TAM SAM SOM calculators.

Example of how to calculate a TAM, SAM, SOM

Picture a SaaS company that offers project management software for SMBs. Here's an example of how they might look at and determine their TAM, SAM, SOM.

Total Addressable Market (TAM)

As a reminder, the TAM represents the total revenue opportunity if the SaaS product achieved 100% market share.

Step 1: Identify the total number of SMBs globally. Let’s say there are approximately 100 million SMBs worldwide.
Step 2: Determine the average annual revenue per customer. Let’s say the average SMB spends $1,000 per year on project management software.

TAM = Number of SMBs × Average Revenue per Customer

TAM = 100,000,000 SMBs × $1,000 = $100 billion

Serviceable Available Market (SAM)

The SAM narrows down the TAM to the segment of the market your business can realistically target and serve.

Step 1: Focus on SMBs in specific regions where your product is available. Let’s say your software is available in North America and Europe, which together account for 20 million SMBs.
Step 2: Consider other constraints such as language and specific industry needs. Let’s say of the 20 million SMBs, 15 million fit your product’s specifications.
Step 3: Do your calculation.

SAM = Target SMBs × Average Revenue per Customer

SAM = 15,000,000 SMBs × $1,000 = $15 billion

Serviceable Obtainable Market (SOM)

The SOM estimates the portion of the SAM that your business can capture within a specific timeframe, considering your market presence and competition.

Step 1: Estimate your market penetration rate. Realistically, let’s say you can capture 5% of the SAM within the next 5 years.
Step 2: Do your calculation.

SOM = SAM × Market Penetration Rate

SOM = $15 billion × 5% = $750 million

As a result, this is what your TAM, SAM, SOM would look like:

TAM: $100 billion (total global market)
SAM: $15 billion (target market in North America and Europe)
SOM: $750 million (realistically obtainable market share within 5 years)

Note: A common mistake many CEOs and marketers make is overestimating their SOM without a clear understanding of TAM and SAM. Make sure to start with your TAM and work your way to your SOM.

Understand your market size for ultimate success

TAM, SAM, and SOM are not just buzzwords, but essential metrics that can significantly impact your business strategy, resource allocation, and investor relations. By taking the time to understand and calculate these metrics, you can make informed decisions that drive your company’s success.

So, why do you need a TAM, SAM, SOM? Because they provide the insights needed to navigate the complex landscape of B2B markets and position your company for long-term growth.

Need help determining or calculating your TAM, SAM and SOM? Reach out to us.

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