Perceive the scale of your market

Whether you’re an established company or a startup, you know your Target market goes beyond the total number of potential customers is important.

Rather than getting such a broad view of how many people want your brand’s products and services, it’s far better to consider different aspects of your unique niche and any untapped potential in specific market segments.

If you take the time to do this right away, you can, for example, secure better funding, more investment opportunities and a greater chance for long-term growth.

Ready to learn how to use TAM, SAM, and SOM to help determine the size of your business in the market? Let’s go.

What is TAM (Total Addressable Market)?

One of the first metrics to become familiar with is the Total Addressable Market (TAM).

Also known as a fully accessible market, This acronym refers to the entirety of market demand for a particular product, service, or commodity.

When looking at TAM, it’s important to know that not everyone in this segment will become your customer.

Instead, it gives you an idea of ​​whether there is room for growth and whether it is possible to have numerous competitors in the same niche.

Generally, when most brands look at market size, they are referring to TAM as a broader view of the size of the industry as a whole.

TAM numbers also ignore elements like competition, production issues, and logistics issues.

Instead, look at the exact number of people in your target market and calculate that number as a larger proportion of the total population.

TAM examples

When looking at TAM, it is important to note that it is a larger number that includes all potential customers or the entire customer.

Here are some examples that demonstrate TAM:

• If you sell baby items, the number of families with children under one year old.
• In the case of pizzerias, the general population in the area who enjoy this type of cuisine.
• At dog toy manufacturers, the number of owners of canines.
• For brands that make specific widgets for manufacturing, the total number of companies within that B2B marketplace using those items.
• A landscaping company could look at the total number of homeowners who have lawns that require monthly maintenance.

See where we are going with these examples?

These are all very large groups that fall into a certain category based on data criteria.

And how do brands find this type of information?

Using basic market research, such as the total number of property owners in a particular region, vehicle owners, or other demographics of your target customers, you can easily develop potential ideas for TAM.

What is SAM (Serviceable Addressable Market)?

In contrast, the Serviceable Addressable Market (SAM) is the segment of the current overall market to which your company can offer goods or services.

Most investors are more interested in SAM since it just shows the percentage of the TAM that you could reasonably be expected to wait.

Elements that contribute to SAM are the operating location, the economic situation, the market competition and everything else that helps to reduce the total number of potential customers and refine them to a manageable sector.

Even the resources you have for shipping or offering services in a particular area can affect your serviceable addressable market calculations.

There are literally thousands of factors that SAM can affect, however It’s important to choose the ones that make the most sense for your industry.

Finding out your company’s SAM is also important as it will help eliminate potentially irrelevant groups or factors based on your current business model.

SAM examples

Unlike TAM, when determining your brand’s SAM, you need to make sure that you are only including the customers you can realistically serve.

Some examples are:

• A local restaurant with a single location and the total number of people living in the same zip code.
• The number of families in a city that require childcare after school.
• In a B2B environment, the number of companies in the United States that have a necessary need for the manufacturing part that your company makes.

Another important thing to keep in mind about SAM is that it also takes into account any major competition.

For example, if you are up against a large retailer, it is realistic to reduce your SAM by a few percentage points to accommodate the customers who buy from your competition.

What is SOM (Serviceable Obtainable Market)?

Finally, there is the term serviceable available market (SOM).

Here you dig properly and determine which should be the most appropriate segment of the overall market when they all buy your product or request your service.

SOM is a good number because it really makes a more reasonable attempt to determine what is possible in terms of selling.

Not only is this important from an investment perspective, it will also help you create traditional and digital marketing goals to factor in these numbers.

It is also important to consider SOM to take into account current production or planning capacity for your business.

If this severely limits your usable market, you should consider increasing your production capacity or even hiring more staff to meet the demand more adequately.

SOM examples

When looking at SOM examples, it is important to note that the number can vary widely from one business and niche to another.

Again, this is a much more accurate number than TAM and SAM as it takes into account your company’s exact needs, capabilities, and competitive position vis-à-vis others.

Examples of SOM are:

• If your company has 3% of the local carpet cleaning services market share.
• Your plumbing company can only serve 300 customers per year due to the personnel capacities.
• There are 900 residents near you who could become regulars at your local steakhouse.
• Your company can produce 5,000 machine parts per week and ship them to 300 different B2B customers.

Do you see these numbers are way more sophisticated than the other two categories?

This highly specific information is a big part of why Calculating SOM is so important to your business and overall growth as an organization.

Why is it important to know the size of your market?

Why is it so important to know the size of your market?

It really comes down to understanding what the opportunities are for your industry and whether there is an actual need and / or need for your company’s products and services.

Understanding your TAM, SAM, and SOM will also help potential investors see better Where in the overall market your brand fits, plus growth potential or challenges along the way.

While it’s great to guess where your brand fits in with the competition in terms of market share. However, if you take the time to compute these numbers, you can get real insight into your company’s position in the overall marketplace.

Finally, the size of your market is key to your overall growth.

Because when you know the opportunities to expand 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 pretty straightforward – once you have a basic understanding of the various formulas.

TAM

To calculate TAM, multiply the total number of customers in the marketplace by the average number of sales.

If you do not know this information, published figures can be used to make assumptions based on market research.

Remember, TAM is the big number, which means it should be a big number.

SAM

To calculate the SAM, multiply the number of customers you can serve in your particular area by the average customer value.

This is a great way to see where your company, with your specific business model, fits in the given market.

HOW

Finally, the formula for calculating the SOM is by multiplying last year’s market share by this year’s SAM.

This should give you a clearer idea of ​​what your approximate share of the market is in your area – which then gives you the opportunity to find areas where changes can be made to operations, marketing, etc.

Summary: Understanding Marketing Size Using TAM, SAM, and SOM

Understanding these three concepts in relation to market size is a great way to show investors that your business has growth potential, and at the same time Identify areas where you may be able to make changes in the future.

Keeping TAM, SAM, and SOM in mind can help you set the right goals and take more proactive steps toward growth.

Speaking of growth, did you know that smarketing is one of the best ways to ensure the success of your business and your brand?

You can learn more about in our blog post marketing and how you can use it to boost your business!