While starting a new company and juggling between finding potential customers, setting a revenue goal, thinking about the profit based on the market, don’t forget to analyse these figures in reality and not just forecast it. Analysing and setting right amount will help you know the reality of the market size and convincing the investors will be smooth, otherwise you will just be throwing arrows without destination.
In the article, we will provide you the methods and details of how to calculate industry’s total addressable market, serviceable addressable market and market share.
TAM SAM SOM
These are the three acronyms for metrics of market in which the market operates. These metrics are the prominent components of a business plan, when you are establishing your marketing strategy. It helps you set realistic profit goals, and you analyse and choose the market which benefits you and is worth your time and services.
Total Addressable Market (TAM)
The total market demand for the product or service that you are providing is called Total Addressable Market. TAM refers to the total amount of revenue a company can generate through its service or product.
As the company needs to identify a market’s potential, TAM plays a very crucial role in estimating the revenue.
Serviceable Addressable Market (SAM)
SAM refers to the identification of the market portion which can achieve high targets. There can be limitations in a business model, e.g., specialisation or geographic which cannot serve the total addressable market and therefore,
SAM determines the market more efficiently.
Service Obtainable Market (SOM)
There are competitors in each and every market, your serviceable addressable market can’t give 100% results as there will always be someone who would prefer different company for the same service or product. Therefore, by service obtainable market, you can determine realistic results of how many customers would really purchase your product or service. SOM are efficient and effective in achieving short term targets.
TAM SAM SOM Template
Except highly advanced market research, there are specific formulas to determine TAM SAM SOM through mathematical calculations. Below mentioned are the formulas for obtaining such figures:
How to Calculate TAM:
Number of Accounts in a Market x Annual Contract Value
We can find out the number of market accounts through market research and annual contract value is found out by company’s historic data of present customers.
Bottom-up approach analysis help in researching about how many accounts are there multiplying with their annual contract value or revenue of each customer.
For example, with the 5000 accounts in market at 300$ ACV, Total Addressable Market will be $1.5million.
How to Calculate SAM:
Target Segment of SAM x Annual Contract Value
SAM works on the target audience only, thus, in calculation too, the target segment is taken with the same annual contract value of customers.
For example, if the market is of about 5000 accounts but the targeted are only 3500 with the same 300$ ACV, then SAM will be $1.05M.
For SAM, analyse the customers and collect who can actually be the potential customers and multiply it with ACV.
How to Calculate SOM:
Last year’s Market Share x This Year’s SAM
Let’s consider last year’s SAM as $3M and the revenue was $1.5M (50%). Now this year’s SAM is $4M, multiply that with .5 to get a SOM of approximately $2M.
These figures will help you give realistic data which can assist in strategies. As you do more and more market research, you will be able to drive more historical data to predict the forecast market scenario.