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STEP 8: Calculate Your TAM, SAM, and Your SOM

Understanding Your Total Addressable Market (TAM):

 

A clear understanding of your Total Addressable Market (TAM) is crucial for any business. It helps you gauge the potential scope of your market to its fullest extent and informs strategic decisions, from product development to marketing campaigns.

 

Here are some of the most effective ways to calculate your TAM:

 

Top-Down Analysis:

 

Method: This approach often begins by using industry research reports or databases that provide information about the entire market size. Once you have the total market size, you narrow it down using percentages that represent your specific segment.

 

Pros: Quick, requires fewer resources.

Cons: Often less accurate since it relies heavily on assumptions.

 

Bottom-Up Analysis:

 

Method: This approach requires a more granular evaluation. Start by identifying a basic unit of your target market (e.g., a single customer or transaction) and then scale it up based on how many such units exist in the market.

 

Pros: Often more accurate than top-down as it's rooted in actual, tangible data.

Cons: More time-consuming and data-intensive.

 

Value Theory:

 

Method: Estimate the TAM based on your product or service's value to customers. For instance, if your software helps companies save on operational costs, quantify the total operational costs across your target market and position your TAM as a percentage of that.

 

Pros: Highlights the value proposition of your product.

Cons: Requires a clear and quantifiable understanding of the value you offer.

Comparative Analysis:

 

Method: Examine other similar companies in your industry, especially if they have shared their market research. You can extrapolate a potential TAM by comparing your product, service, or solution to theirs.

 

Pros: Utilizes real-world data from established businesses.

Cons: Assumes that market conditions and business models are similar.

Geographic Analysis:

 

Method: Particularly useful for businesses with a physical presence or those targeting specific geographic locations. Calculate the TAM based on population data, demographics, and other location-specific metrics.

 

Pros: Offers localized insights and can be very accurate for region-specific businesses.

Cons: Might not consider global or online market potentials.

Expert Interviews:

 

Method: Engage with industry experts, analysts, or consultants who might have insights or have conducted their own research on the market size.

 

Pros: Taps into specialized knowledge.

Cons: Access to such experts can be costly or limited.

 

Understanding Your Serviceable Available Market (SAM):

 

Your Serviceable Available Market, or SAM, is the segment of the TAM that your product or service can actually serve. It's your realistic market opportunity.

 

Here's how to calculate your SAM:

 

Step 1:

Identify the geographic area you serve or plan to target initially, considering where your potential customers are.

 

Step 2:

Determine the customer segments within this geographic area that are most likely to buy your product or service. Consider factors such as age, income level, gender, occupation, and interests.

 

Step 3:

Estimate the number of potential customers in each segment and multiply by the average annual revenue you expect from each customer.

 

Example Calculation: If you plan to serve 10,000 customers in the next year with an average revenue of $50 per customer, your SAM would be 10,000 * $50 = $500,000.

 

Pros:

Targets a more realistic, immediately addressable portion of the market.

Cons:

Requires detailed knowledge of your target customer segments and geographic locations.

 

Understanding Your Serviceable Obtainable Market (SOM):

 

Your Serviceable Obtainable Market, or SOM, is the portion of the SAM that you can realistically capture, especially in the short to mid-term. It is your short-term goal.

 

Here's how to calculate your SOM:

 

Step 1:

Analyze your competition and market conditions in your SAM.

 

Step 2:

Estimate your market share in this competitive landscape based on your unique value proposition, sales and distribution capabilities, and marketing strategies.

 

Step 3:

Multiply your estimated market share by your SAM.

 

Example Calculation: If you estimate that you can capture 5% of your SAM of $500,000, your SOM would be 0.05 * $500,000 = $25,000.

 

Pros:

Acts as a focused, achievable target, which is essential for startups and growing businesses. It's more precise and tied to reality.

Cons:

It depends heavily on your ability to execute your business plan effectively.

 

As you can see, TAM provides a broad view of the potential, SAM narrows the view down to a realistic opportunity based on your specific offerings and targeted geographic location, and your SOM further refines this into what is practically achievable in the near term, given your resources and competition. Before moving to the next step, make sure that you have these mapped out.

 

HELPFUL TOOLS TO COMPLETE STEP 8:

 

For a good video explanation of how to complete your Total addressable market, one can be found here and another can be found here

 

 

For a good book explanation of how to better understand and complete your Total addressable market, one can be found here

 

For a good article and template to use, one can be found here.

 

To hire a pro to research and determine your TAM, SAM, or SOM, we can get you a price quote by clicking here

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