TAM SAM SOM is a set of acronyms used to quantify the business opportunity for a brand in a given market. The acronyms stand for the following terms:
- Total Addressable Market (TAM) - represents revenue opportunity at 100% market share, as if no competition exists.
- Serviceable Available Market (SAM) - represents the portion of the TAM that can be served by a company’s products and services.
- Serviceable Obtainable Market or Share of Market (SOM) - represents the portion of the SAM that can be realistically captured and served.
How TAM is calculated
There are four ways to calculate TAM:
- Reference third party research. This is the simplest approach. In the technology industry, analyst firms like IDC and Gartner provide in-depth forecasts for given industries, projecting TAM across a multi-year period. Similar research is provided by analyst firms in other industries, such as automotive and agriculture.
- A top-down approach. This takes macro-level (top) data and applies conditions or filters to that data to eliminate segments.
- Bottom-up analysis. This approach begins with local market data, and then extrapolates that outward to a wider context.
- Value theory. This approach applies to categories where new offerings are introduced to displace incumbent offerings. The TAM is calculated by quantifying the benefit derived by the new offering to estimate the total revenue opportunity.
Example of TAM SAM SOM
The relationship between TAM SAM SOM is illustrated in the following scenario:
An automobile mechanic business services new Ford models. According to the website Statista, Ford sells approximately 6 million new models per year, globally. The mechanic business targets customers in their first year of ownership, so the TAM is 6 million models.
The mechanic business is based in Queens, New York and services customers in the five boroughs of New York City. For this hypothetical example, 75,000 new Ford models were sold in New York City during the past year. The SAM for the automobile mechanic business is 75,000.
There are hundreds of automobile mechanic businesses in New York City, including those certified to work on Ford cars. Competitive factors include pre-existing relationships, such as with other mechanics, reputation and distance from customers’ homes to the mechanic. During the past year, the Queens-based business serviced 150 new Ford models. Its SOM is calculated as cars serviced divided by its SAM, or 150 / 75,000 = 0.2%. The mechanic business’s market share for is 0.2% of the 75,000 new Ford models sold in New York City.
Who uses TAM SAM SOM?
TAM SAM SOM is used by entrepreneurs launching a new business, as well as investors who are considering funding those entrepreneurs.
Entrepreneurs and investors seek markets with strong potential, or a high TAM. In isolation, however, a high TAM may not be a worthwhile opportunity. Entrepreneurs and investors want to be confident that their offering has a sufficiently high serviceable available market (SAM) and a means to capture a large share of market (SOM).
For example, the TAM for a given market is $1 billion. That applies to a global market, however, and our business services a small region of northern Europe. The SAM for our business is only $100,000. Even though the TAM is large, the small SAM may not be worth launching the business in this particular region.
Importance of TAM SAM SOM
TAM SAM SOM provides a useful framework for helping plan business strategy at different phases of a company’s growth.
SOM and SAM help businesses plan for short-term growth by knowing the total revenue potential today (SAM) and seeking to maximize market share relative to the competition (SOM).
TAM helps businesses understand the potential for growth at scale, including product capability expansion and geographic expansion. For example, if TAM is 10 times SAM, a business might focus on maximizing SOM in their local market, knowing they have tremendous growth potential when they’re ready to expand beyond their SAM.