With all the excitement that comes with beginning a new company and gauging its industry’s profit potential or forecasting a income goal for your business, you need to remember to root these numbers in reality.
If you don’t, you could get into a market that doesn’t have a large enough market size to convince investors to back you, or you could set an unrealistic revenue objective for your business and burn your employees out.
To help you avoid these issues, we’ve put together a guide that’ll show you exactly how to calculate your industry’s total addressable marketplace, serviceable addressable market, and share of market.
W TAMTYM MIEJSCU SAM SOM
TAM, SAM, and SOM are acronyms for three metrics to describe the marketplace your organization operates in. These types of metrics are key aspects of a business plan, particularly when you craft your marketing and product sales strategy, set realistic income goals, and choose to your markets that are worth your time and energy and resources.
TAM (Total Addressable Market)
Total addressable market or W TAMTYM MIEJSCU refers to the total market demand for a product or service. It’s the most of revenue a business may possibly generate by selling their particular product or service in a specific market.
Total addressable market is usually most useful for businesses to objectively estimate a specific market’s potential for growth.
SAM (Serviceable Addressable Market)
Due to the restrictions of your business model (such since specialization or geographic limitations), you will not likely be able to provider your total addressable market.
Serviceable addressable market is most useful for companies to objectively estimate the portion of the market they can acquire to determine their targets.
OCH (Serviceable Obtainable Market)
Unless of course you’re a monopoly, you most likely can’t capture 100% of your serviceable addressable market. Even though you only have one competitor, it would still be extremely difficult to encourage an entire market to only purchase your product or service. That’s why it is crucial to measure your serviceable obtainable market to determine how many customers would realistically benefit from buying your product or service.
Functional Obtainable market is most successful for businesses to determine short-term growth targets.
TAM SAM SOM Template
Now that you know what each of these acronyms are and what they’re used for, let’s get into the nitty gritty on how to calculate TAM, SAM, and OCH. Doing so requires advanced researching the market ahead of time, but here are the particular formulas once you’re able to get those figures:
Total Addressable Market (TAM) Calculation
The best way to calculate total addressable market is by managing a bottom-up analysis of an business. A bottom-up analysis entails counting the total number of customers in a market and multiplying that number by the average yearly revenue of each customer in this particular market.
Serviceable Addressable Market (SAM) Calculation
In order to calculate your serviceable addressable market, count up all the customers that would be a good fit for the business and multiply that number by the average annual income of these types of customer inside your market.
Serviceable Obtainable Market (SOM) Calculation
Separate your revenue from last year by your industry’s serviceable addressable market from last year. This particular percentage is your market share through last year. Then, multiply your own market share from last year from your industry’s serviceable addressable marketplace from this year.
Keep in mind that these figures will largely end up being estimates to inform your technique. The more market research you do as well as the more historical data a person build up, the more precise your own planning will be.
Editor’s note: This post was originally published in March 2019 and has been updated just for comprehensiveness.