In order to understand the potential of a business idea, it’s important that you understand the local market so that you can see whether your product or service is likely to be a success. This includes gaining a deep understanding of the potential market size; to put it simply, without people or organizations to buy your product or service, it will fail at the first hurdle.
The business world is full of uncertainty, but in order to see growth, it is necessary to make some assumptions and take a few risks.[1] The impact and nature of those risks will depend on the organization and individuals involved, but the actions taken will usually be supported by relevant metrics and industry knowledge. One of the most popular and impactful ways of measuring market size is to use TAM, SAM, and SOM. Far from being just another series of acronyms that is tossed around by people in the know, TAM SAM SOM are a key part of the foundation of your sales and marketing efforts and lead generation strategies.
By gaining an in-depth understanding of these metrics, what they mean, and how they could impact your business plan and organization, you can add value and gain quality leads because they don’t just tell you how many people you should be reaching in order to achieve success; they tell you who those people are. In this article, we will go through the basics, from TAM SOM SAM meaning in business to how you can access that data and intelligence from RevenueBase, and how you can use that data to your advantage.
When it comes to making the most of data, a little knowledge can sometimes be a dangerous thing. While the concept of TAM SAM SOM is relatively simple, it is often misinterpreted, which can lead to false data and incorrectly influence investments and activities. A well-known example of miscalculated TAM SAM SOM is NYU Professor Aswath Damodaran’s low valuation of investor Bill Gurley’s investment in Uber.[2] Gurley considered it to be a golden business opportunity, and claimed Damodaran had miscalculated the TAM by defining the product as a limo/taxi service, instead of Gurley’s definition of it as a worldwide transportation business.[3] Organizations that take the time to develop an true understanding of their potential market will gain the ability to map out their future market potential and gain insights that will allow them to compete in the most crowded markets.
Let’s start at the beginning. TAM SAM SOM is a set of metrics used by organizations to determine the viability of a new product or service by market share, and to help marketing and sales teams to identify realistic audiences and KPIs based on those.
We know that TAM stands for Total Addressable Market, or Total Available Market but what does that mean for you as a business? Your total available market is the industry’s profit potential for a product or service: the number of customers –organizations, groups, or individuals- who utilize a particular product or service and could therefore buy your product or service, multiplied by the annual contract value or anticipated revenue of that product or service.
This gives organizations a good idea of the opportunities available for a specific new venture, product or service, and helps them to decide how much to invest in terms of resources and funding. TAM is also valuable in demonstrating the longer term potential of a product or service by helping to outline the product’s capacity of expansion.
However, any Go-to-Market team knows that you can’t realistically service everyone who could buy your product, especially in earlier growth stages. It’s important to target certain segments and offer a personalized service: a winning growth strategy for lead generation.
You know your total market share in the form of total addressable market– everyone who could, theoretically, buy your product or service. Now you need to narrow that vast number potential customers down to who you can actually service with your existing business model; your go-to-market strategy likely focuses on specific segments such as particular industries, geographical locations or niche product or service needs. This is your SAM – your serviceable addressable market; the number of organizations who could buy your product or service and fall into the segments you particularly service, making them more likely to choose you. But even your best sales and marketing teams can’t capture your entire serviceable addressable market; you do have competitors after all! Which is where your SOM comes in.
While it can certainly be beneficial to target your serviceable addressable market, it’s critical for Go-to-Market teams to understand which customers they can serve the best in the short-term – those who are most likely to purchase their product or service. Your serviceable obtainable market clearly defines your achievable market share: the fraction of the total market demand that is most viable for your product or service right now, and which you can reasonably expect to service based on your business model and your particular competitive landscape.
Your total revenue opportunity as defined by your total addressable market can be broadly calculated as revenue per customer x number of customers. However, the source of that data that you use to determine your market size and calculate TAM can – and will – impact the resulting figures, potentially giving you an unrealistically huge market size, or a deceptively small one.
TAM Calculation:
Number of Customers in a Market X Annual Value of Customer
This approach takes a macro view, assessing the economy on the broadest possible scale and can, therefore, lead to extremely high TAM, only a fraction of which will be your SAM and SOM.
The bottom-ups approach takes a more market specific approach, and counts the number of customers in a specific market (from market research) and multiples that by the annual contract value (from your historical organization data). This is often the most accurate methodology; RevenueBase customers can access such information to high levels of accuracy, providing a robust starting point for the calculation of TAM followed by SAM and SOM.
The value theory approach bases the TAM calculation upon an estimation of what clients would be willing to pay for a product or service. This method is often not accurate for new products or a newly developed business idea, but can be a useful market research tool for discovering the TAM for product upgrades, as calculations can be based on an estimated uplift of current expenditure.
Both bottom-up and top-down theories have pros and cons. For the most robust results, it can be helpful to use a range of datasets and estimate your TAM in the middle.
Any business knows that markets can fluctuate sometimes from day to day. While daily data isn’t necessary to determine your TAM, if you are relying on those figures long term, be aware of data decay and ensure that you review your TAM with updated data as appropriate.
With the entire market in your sights, it is necessary to narrow down your market to the organizations that you can realistically service. In a nutshell, SAM is the percentage potential market revenue that an organization could generate revenue from, based on particular segments they serve. For example, if you service the New York City area, you’d want to understand the number of customers in that particular segment who may purchase your product. Similar to TAM calculations, SAM can be determined using either top-down, bottom-up or value theory, but combining the three vantage points will mitigate the risk of inaccurate calculations thanks to outdated data or overestimation of the global market.
SAM Calculation:
Target Segment of TAM X Annual Value of Customer
Armed with market research and the knowledge of who you could realistically serve, it is time to identify who you will serve. Your SOM is a tailored niche of the market that you are confident you can capture and serve successfully at the current stage of your organizational growth. SOM can even help you to identify untapped customer segments that may yield better ROI thanks to their niche requirements.
SAM Calculation:
Last Year’s Market Share X This Year’s SAM
As your company grows and your business model evolves, it’s important to review your evolving TAM SAM SOM, as well as answer important questions about your target audience, growth aspirations, and current capacity.
At RevenueBase, we are proud to be pioneering the concept of a ‘Revenue Database as a Service’. Utilizing generative AI, we obtain data on a granular level that empowers you to identify your TAM SAM SOM at the click of a few buttons. A RevenueBase Subscription will also allow you to instantly access highly accurate information that you can use to determine your market size and potential, including number of accounts that fit your ICP (Ideal Customer Profile) and total market value. In addition to understanding your market size, you can also assess and segment your target accounts and buyer personas by industry, region or sales territory, safe in the knowledge that data is appropriately cleansed and constantly updated to give you the most accurate, and therefore most impactful, data.
Investing time and money into elaborate processes to determine your TAM SAM and SOM without ensuring the validity and accuracy of the data is a bit like buying yesterday’s news because it is being sold at a knock-down price: it may have been accurate and valuable at some point, but does not give you the data that you need to meet your market segment with what they want or determine the current climate, making it practically worthless. Utilizing inaccurate or out of date data is more than a bad investment choice, it could actually cost you money as it can cause damage by skewing results from which important strategic decisions may be made.
To achieve success in your go to market strategy, it is important that you take tried and tested frameworks and adjust them to meet your own needs. Get in touch if you want to try a free data sample and see how many customers and how many market opportunities you can gain from a targeted approach.
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