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What Does TAM SAM SOM Stand For? Why Are They Important For Businesses?
Last Updated on: November 16th, 2024
TAM SAM SOM is an acronym, where TAM is the Total Addressable Market, SAM is the Serviceable Market, and SOM accounts for the Serviceable Obtainable Market. In short, these three terms are pretty popular when it comes to the sales world.
These are the sales terms that are a representation of metrics that help the businesses define their customer and the opportunities for revenue within the market.
The TAM SAM SOM metrics offer critical information for the investors. This is the kind of information that would be of help to the potential investors to evaluate the upsides of a business through SAM, at the same time justifying the risks with SOM.
In this article, we shall discuss all the intricate details of TAM SAM SOM. We will also be including how to calculate them and why they are so important in the sales world. Stay with us till the end to get every detail that is necessary to understand the metrics in depth.
What Are The Acronyms TAM SAM SOM?
TAM SAM SOM are the three acronyms that are used together to deal with the accessibility and market size of a business.
What Is TAM?
TAM, or Total Addressable Market, is the first and the widest metric of the three. It is also known as the Total Available Market. TAM is a representation of the absolute maximum size of the market or the potential revenue that any business may generate with its services or products.
TAM does not consider any competition, marketing budgets, geographical borders, or any other constraints that narrow down the market.
What Is SAM?
The next one here is SAM, which is the Serviceable Addressable Market. It is also called the Serviceable Available Market. SAM is a subset of TAM. It is defined by the demographics of the niche of the product. SAM shows how big a market segment exists, which the business model and the product may serve.
A very simple example will help in highlighting the difference in this case. For an entrepreneur who wishes to open a donut shop, their TAM is going to be anyone who wishes to visit a shop selling sweet treats or baked goods. However, the SAM for the very same business would represent every individual who specifically wants a donut.
What Is SOM?
SOM, or Serviceable Obtainable Market, is the last of the metrics in this term. It offers a very realistic look at what market share a business can reasonably get 3 to 5 years later in the business. To calculate the SOM, businesses have to consider marketing strategies, competition, costing plans, and other such variables.
Importance Of TAM SAM SOM
Every well-developed business plan would need an accurate size of the market. TAM SAM SOM offers help to startups and other enterprise companies to assess the feasibility of their product. It also gives them the option to implore investors with a higher degree of confidence in return.
There are other advantages as well that come with calculating these metrics as well. TAM, for instance, helps businesses govern their product competitiveness and the extent of any such untouched customer segments.
SAM helps businesses improve their product niche and plan goals that are neither long-term nor short-term.
SOM, on the other hand, offers the opportunity for the investors to mitigate the risks. When you calculate them correctly, it gives businesses and investors a hypothetical worst-case scenario. TAM, in contrast, provides only the upsides.
Of these three metrics, calculating SOM effectively is the most crucial. It proves the case of your business and validates the capability to pinpoint and serve the target market. If a mismatch at all comes up between the reality and the prediction of SOM, it may lead the investors to frown upon the capability of a business to expand.
TAM SAM SOM Calculation
Luckily, there are easy formulas that you may use to calculate each of the three metrics. There is little research on these processes involved. However, the efforts are totally worth it.
TAM Calculation
To calculate TAM, you need to multiply the total account numbers in the market by the annual value of contracts of those contracts.
TAM = Total number of accounts X Annual Contract Value
There are two ways in which you may determine the total number of accounts. The first one is the top-down approach that depends on the published market analysis to help estimate the size of the target market.
However, the bottom-up analysis, which makes use of primary research, is usually a more reliable process. In the real world, it is impossible for organizations to attain 100% of their TAM. This is the reason why they calculate SAM.
SAM Calculation
Here is the formula that you may use to calculate SAM:
SAM = Target Percent of TAM X Annual Contract Value
SAM is a very crucial metric. A sizeable TAM would have no meaning if businesses don?t have medium to longer-term plans that constantly help to increase the SAM.
SOM Calculation
This is the formula that you may use to calculate the SOM of your business:
SOM = Market Share of the previous year X SAM of this year
Yet again, it is very important that this figure is absolutely accurate. SOM is the ultimate litmus test for investors to determine if they can trust the business plan.
TAM SAM SOM Examples
It may get pretty complicated to visualize the concept of TAM SAM SOM. Let us have a look at some of these examples, which would help illustrate these important metrics further:
Let?s assume a Sushi restaurant?s TAM is going to be all restaurants. With zero constraining factors like customer preference, geography, price range, or production capacity, this sushi restaurant might presumably serve any of the customers who are in the market to eat at the restaurant.
The restaurant would represent the SAM by the individuals who like restaurants that specialize in Asian foods, particularly sushi, mainly because this is a sub-niche market. The SAM would also consist of the people who live within the radius of this restaurant.
The SOM for the sushi restaurant is going to be the customers who would be willing to pay as per the price of the menu and the ones who prefer the type of atmosphere that this restaurant offers. Even with these constraints, there is less likelihood for the sushi restaurant to capture the full population. SOM must also account for the proximity, number, and success of the competitors.
The Bottom Line
Do you have TAM SAM SOM in your business plan? Did they do their job well and help you measure your actual revenue? Is it the correct time to re-evaluate the potential of the market or a part of the market you are all set to capture by the midterm?
You can easily use the formulas in the article or to get started or re-evaluate the process.
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