With all the excitement that comes with starting a new business and gauging the profit potential of its industry or forecasting a sales target for your business, it is important to remember to put these numbers into reality.
If you don’t, you could be entering a market that isn’t big enough to convince investors to support you, or you could set an unrealistic sales target for your business and burn your people out.
To help you avoid these problems, we have put together a guide that will teach you exactly how to calculate the total addressable market, maintainable addressable market, and market share of your industry.
TAM SAM SOM
TAM, SAM and SOM are abbreviations for three metrics used to describe the market in which your company operates. These metrics are key components of a business plan, especially when building your marketing and sales strategy, setting realistic sales targets, and choosing to input markets that are worth your time and resources.
TAM (Total Addressable Market)
The total addressable market, or TAM, refers to the total market demand for a product or service. This is the maximum revenue that a company can potentially generate from selling its product or service in a given market.
The overall addressable market is most useful for companies to objectively assess the growth potential of a particular market.
SAM (Serviceable Addressable Market)
Because of the limitations of your business model (e.g. specialization or geographic restrictions), you are unlikely to be able to serve your entire addressable market.
A serviceable addressable market is most useful for businesses to objectively gauge the portion of the market they can acquire to determine their goals.
SOM (Serviceable Obtainable Market)
Unless you have a monopoly, you most likely cannot capture 100% of your serviceable addressable market. Even if you only have one competitor, it would be extremely difficult to convince an entire market to buy just your product or service. For this reason, it is important to measure your serviceable market to see how many customers would realistically benefit from buying your product or service.
The serviceable market is most useful for businesses to determine short-term growth goals.
TAM SAM SOM template
Now that you know what these acronyms are and what they are used for, let’s look at how TAM, SAM, and SOM are calculated. This requires advanced market research in advance. However, once you can get these numbers, here are the formulas:
Calculation of the total addressable market (TAM)
The best way to calculate the total addressable market is to do a bottom-up analysis of an industry. A bottom-up analysis is to count the total number of customers in a market and multiply that number by the average annual sales of each customer in that market.
Calculation of the maintainable addressable market (SAM)
To calculate your serviceable addressable market, enumerate all potential customers who are well-suited for your business and multiply that number by the average annual sales of those types of customers in your market.
Calculation of the maintainable market (SOM)
Divide your revenue from last year by your industry’s serviceable addressable market from last year. This percentage is your market share from last year. Then multiply your market share from last year by the addressable addressable market in your industry from that year.
Note that these numbers are mostly estimates to help educate your strategy. The more market research you do and the more historical data you build up, the more precise your planning will be.
Editor’s Note: This post was originally published in March 2019 and has been updated for completeness.