TAM, SAM, SOM: the calculations

We know we promised this method would stay far away from maths class, but to use this tool to the best of its potential you need to add some numbers.

A few weeks ago, we published a blog introducing the concept and uses of the TAM, SAM, SOM method. Hopefully we’ve convinced you that is an acronym worth remembering, but now you need to know what to do with it.

Number crunching time

To calculate the numbers that you might need for your investors, but you will definitely need for your business strategy, start by doing extensive market research into your industry. Then you can calculate potential market sizing for your venture.

Firstly, to calculate the total addressable market (TAM)- the total market demand for a product or service- there are two main methods.

Top-down approach: this approach uses industry research obtained from reputable sources to estimate the total population of your target market. By applying geographic, demographic and economic assumptions to this overall number, you will narrow down the information to a specific market segment (SAM).

Bottom-up approach: this approach uses primary market research. It involves counting the total number of customers currently in the market –customers of competitors, for example – and multiplying that number by the average annual customer revenue.

Next steps to success

Once you have the numbers from calculating the TAM, you can apply that knowledge to predict the revenue of your serviceable available market (SAM)- those who are likely potential customers- by simply using the target market of your TAM calculation. It is more efficient and accurate to use the bottom-up approach for this, as you have a more concrete idea of the SAM from prior research.

By multiplying the number that you attribute to being your SAM by average annual customer revenue from that group, you have calculated for your investors the potential market for your business and started to alleviate some of the risk.

However, it is important to remember that when starting a new business or venture it is unlikely you will achieve the SAM immediately. To be realistic, it is better to target a portion of the SAM that will be your sustainable obtainable market (SOM) or the portion of the market you will be able to serve.

Estimating your SOM involves more market research, specifically into the niche of the market you initially wish to enter. By comparing your pricing, product, marketing, and sales strategy to your competition you can gauge what part of the market would be achievable for you in the short term. Even though it is an estimated value, this number should be based on realistic assumptions of your profit margin and pricing plans.

Putting these numbers to good use

Once you have crunched all the numbers you have established where your business stands within these markets. Being able to produce the SAM and SOM calculations helps to win investment and propel your venture further. Now you know the SAM it becomes easier to design your strategy around moving towards that number.

The TAM is a good reminder of the potential your company has but, ultimately, the SAM is the number that will tell you and your investors if this venture is worth it.  

At Copestone we have over a decade of experience working with clients ranging from start-ups to multinationals, including strategizing revenue generation and marketing support to build and scale brands. Contact us for a confidential conversation to discover how our experts can bring TAM SAM SOM to life in your own business.

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