With all the excitement that comes with starting a new company and measuring your industry’s profit potential or forecasting a revenue target for your business, you need to remember to root these numbers in reality. If you don’t, you could enter a market that isn’t large enough market size to convince investors to back you, or you could set an unrealistic revenue goal for your business and exhaust your employees.
To help you avoid these problems, we have put together a guide that will teach you exactly how to calculate your industry’s Total Addressable Market, Useful Addressable Market, and Market Share.
TAM SAM SOM
TAM, SAM and SOM are acronyms for three metrics to describe the market in which your organization operates. These metrics are key components of a business plan, especially when you build your sales and marketing strategy, set realistic revenue goals, and choose to enter markets that are worth your time and resources.
TAM (Total Addressable Market)
Total Addressable Market or TAM refers to the total market demand for a product or service. It is the maximum amount of income that a company can generate by selling its product or service in a specific market. The total addressable market is most useful for companies to objectively estimate the growth potential of a specific market.
SAM (Service Addressable Market)
Due to limitations in your business model (such as specialization or geographic limitations), you may not be able to serve your entire target market. The Useful Addressable Market is most useful for companies to objectively estimate how much of the market they can acquire to determine their objectives.
SOM (market obtainable with service)
Unless you are a monopoly, you most likely cannot capture 100% of your accessible accessible market. Even if you only have one competitor, it would be extremely difficult to convince an entire market to just buy your product or service. That is why it is crucial to measure your available and useful market to determine how many customers would realistically benefit from buying your product or service. Affordable and useful market is most useful for companies to determine short-term growth targets.
TAM SAM SOM template
Now that you know what each of these acronyms are and what they are used for, let’s get to the nitty-gritty of how to calculate TAM, SAM, and SOM. Doing so requires advanced market research ahead of time, but here are the formulas once you can get those figures out:
Total Addressable Market (TAM) calculation
The best way to calculate the total addressable market is by running a bottom-up analysis of an industry. Bottom-up analysis involves counting the total number of customers in a market and multiplying that number by the average annual revenue of each customer in this market.
Useful Addressable Market Calculation (SAM)
To calculate your useful addressable market, count all the leads that would be a good fit for your business and multiply that number by the average annual income of these types of customers in your market.
Useful obtainable market calculation (SOM)
Divide your revenue from last year by your industry’s useful addressable market from last year. This percentage is your market share from last year. Then multiply your market share from last year by this year’s useful addressable market in your industry. Keep in mind that these figures will largely be estimates to inform your strategy. The more market research you conduct and the more historical data you accumulate, the more accurate your planning will be. Editor’s Note: This post was originally published in March 2019 and has been updated for completeness.