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TAM, SAM and SOM are market size metrics used to help businesses understand the market potential for their products or services. These metrics are crucial for strategic planning, especially for startups and businesses looking to attract investors.
1. TAM (Total Addressable Market)
TAM represents the total revenue opportunity available if a business captures 100% of the market share. It’s the broadest measure of market size and includes all potential customers who could benefit from the product or service.
• Calculation: TAM is calculated by estimating the total demand for a product or service within a specific market.
• Example: If a company develops a new type of smartphone, the TAM would include the global smartphone market.
2. SAM (Serviceable Available Market)
SAM is the portion of the TAM that is targeted by a business's products or services and is within its geographical and technological reach. It reflects the portion of the market that the company can realistically serve.
• Calculation: SAM is derived from TAM by narrowing it down based on specific criteria such as geography, customer segments, or product functionality.
• Example: For the same smartphone company, the SAM could be the smartphone market within North America, excluding regions where the company does not have a distribution network.
3. SOM (Serviceable Obtainable Market)
SOM is the portion of the SAM that a company can realistically capture in the short term. It represents the achievable market share based on the company’s current capabilities, resources, and competitive landscape.
• Calculation: SOM is estimated by evaluating the company's market strategy, competition, and operational constraints.
• Example: For the smartphone company, the SOM might be the market share they can capture in North America within the next year, considering their current marketing efforts, brand recognition, and sales capabilities.
Visual Representation ?
Imagine a set of three concentric circles:
• TAM is the largest circle, representing the entire market potential.
• SAM is a smaller circle within TAM, representing the market that the company can serve.
• SOM is the smallest circle within SAM, representing the realistic market share the company aims to capture.
Importance of TAM, SAM, SOM ?
Strategic Planning: Helps businesses set realistic goals and allocate resources effectively.
• Investor Communication: Provides investors with a clear understanding of market opportunities and growth potential.
• Market Analysis: Aids in identifying and prioritizing market segments to target.
• Risk Management: Helps in assessing market risks and potential returns.
Conclusion ?
Understanding TAM, SAM, and SOM helps businesses make informed decisions about where to focus their efforts and how to scale their operations strategically.
