What is TAM SAM SOM and why do small businesses need it?

How can TAM SAM SOM help small businesses?

TAM SAM SOM are useful tools for startups and established businesses of all sizes. The metric, when used well, will allow you to define the industry’s profit potential and form realistic goals and a longer term strategy for success. It can also form the basis of your sales and marketing strategy, allowing you to identify your ideal customer profile (ICP) and focus your sales and marketing efforts on reaching your potential customers. This is particularly important for smaller businesses for two key reasons:

• Small businesses will have a smaller serviceable addressable market, which will make it easier to drill down and identify those in the serviceable service obtainable market, via segmentation.
• As a small to medium sized business, it is likely that you will not have the luxury of unlimited financial resources; knowing your TAM SAM SOM can help you to a business plan to make the most of those resources, focus on business growth, and generate revenues while you are at it.

How are TAM SAM SOM calculated?

How to Calculate TAM

Total Addressable Market can be calculated by working out total market demand, taking the number of potential customers and multiplying them by the revenue opportunity. i.e.1,000,000 customers at £100 per year would make your TAM £100m.

The tricky bit comes when you are deciding which figures to use in the bottom up analysis of the calculation. The top-down approach can result in a huge market size e.g. for car sales, that market could be everyone that has a driving license, or has ever owned a car. While theoretically accurate, this could give you an unrealistically large (and potentially unwieldy) figure. This is where the bottom-up approach comes in.

The bottom-up approach uses local market data as well as your own performance to date and, if available and preferred, that of other businesses within the industry. This slightly more involved calculation is often more accurate, however it could be skewed by factors outside primary market research out of your control, for example, low performance due to recession or a new competitor in the industry, or particularly high performance thanks to a change in the market, such as a spike in need that is likely to continue, or a competitor ceasing operations.

Another way of identifying TAM within a TAM SAM SOM template is via value theory. This approach estimates how many customers would be willing to pay – and how much – for a product or service. 

In situations where it is possible to over or underestimate values, particularly values that may go on to significantly impact your marketing and sales strategies, it is advisable to use only a fraction or mix of metrics. You will see in the image below that the company took a range of high and low estimates to calculate the TAM.

How to calculate SAM

Once you have identified every person in your market, you need to be a little bit more realistic. Your serviceable addressable market is the market share that you could serve with your product or service and, therefore, generate revenue from. This can also be done using a top-down or bottom-up approach, with the most accurate method being to take several different factors and create an average or a range for your serviceable available market SAM.

How to calculate SOM

TAM SAM SOM are used globally and across industries to help strategists, leaders, marketing teams and sales teams to identify untapped customer segments, highlight areas of strength and weakness and set goals and KPIs moving forward. Investing time in your TAM SAM SOM is a key vector for success for many organisations. However, it is not a one-size-fits-all process. In order to make it work for you, you need to understand the process and make sure that you incorporate regular reviews into the methodology so that you stay ahead of the market and – most importantly – other businesses.