TAM SAM SOM is essential for any company to start a business or serve a product to their target audience. It helps provide an adequate user experience and run a successful business. To understand the potential of any business, the estimation of TAM SAM SOM is essential for the business owner, whether they are self-funding their business project or for the investors who may invest in it. Understanding the potential and profitability of any product business is necessary to allocate funds. It is essential because you need to get an idea about how large the market size is, make investment decisions and comprehend the opportunities and growth of the business. This enables your business to create the best marketing strategies and acquire the maximum share of a product's market. Acronyms TAM, SAM and SOM stand for the total addressable market, serviceable addressable market, and serviceable obtainable market. They are crucial business metrics that enable a company to decide on making an entrance into the market to establish their product.
One of the leading factors in generating revenue or establishing your product in the market is the size and acceptance of the market. You may come up with a unique, problem-solving product with a minimal price point that also gives maximum benefit to your chosen market, but what if they are not ready to buy it? Selling a product has never been a piece of cake, no matter the medium of promotion (online and offline marketing) you use or how well-crafted your product might be.
Suppose you own a content marketing company and enter a market with a population of 10,000. The users ready to promote their product using content marketing are only 100. In another scenario, suppose the market population is 1000. The number of people willing to outsource content marketing services is 300 (the size of your market is not the population, it is the number of buyers ready to use or buy your product). The market size calculator and the acceptance of the people is one of the determining metrics used to decide whether a company wants to jump into the market or ignore it.
In scenario one, the size of your market is 100 people and in the second one, it is 300 people. Even if your product is mediocre, it will have a good demand in an accepting market, so it becomes necessary to choose an efficient one. This understanding will only come with market research that will help you select the better scenario between the two choices. Many external factors direct the market choice of any brand rather than just considering the population.
Demographics of the population are taken into account when entering a market. Your product might be helpful to a specific demographic and might be of no worth in a particular geographic location. Also, depending on the population's age, religion, race and per-capita income. Demographics are the primary influencers while entering a market, but there are other factors too, like:
• Government regulations.
• Availability of resources.
• The belief system of the people.
• Their needs related to the product.
A product enters two types of needs, i.e., a new market or an existing market. Suppose your product is providing a solution to a new kind of problem. In that case, it enters a new market with low or no competition. If it allows for a reformed version of an already available product, it comes under an existing market. Analyzing all these aspects of a market paints a clear picture of which market is suitable to introduce your product.
E.g. the first company to understand the benefits of marketing their product online and introducing digital marketing created a new market for a fresh way of marketing. Following this company’s idea, several other companies jumped into the business of online marketing, offering something extra from the existing one. The first one initiated an idea and the others reformed and modified the idea.
TAM SAM SOM for a business
Total addressable market - The maximum revenue generated by consuming a particular product is the total addressable market. TAM gives a broader idea of market capitalization that a product (goods and services) can achieve by capturing all the customers who need that product. It represents monopolistic data that if there were not a single competitor and you were the only supplier, this would be the market capitalization. It works as a market size calculator; TAM calculation eases the process of decision-making on whether entering a market with your product is feasible or not. It helps in estimating the annual expenditure of the potential customer on a particular product which supports the investors in determining the growth and profitability of that product's market. After the TAM calculation and identifying the feasibility of the market, it becomes easy for you to plan marketing strategies for the development and focus on the target audience by appropriate:
• Budget allocation.
• Choosing the correct promotional or awareness medium.
• Framing of a product message.
E.g., Suppose you have started an SEO marketing company and the total customer spending cost on marketing services is five billion dollars annually while total spending on SEO marketing is one billion dollars annually. In that case, your TAM is one billion dollars. The revenue extent of your product can never acquire the estimated TAM. It is not possible for any company in a capitalist or mixed economy to capture the whole market revenue of a product. Estimation of TAM is only done to ensure how big the market of that product is, the future growth possibilities of the product in the market and if it is the correct decision to be involved in the business of that product.
TAM calculation
There are broadly two TAM calculation ways: a top-down approach or a bottom-up approach. Both these approaches are essential to market size calculators that provide the revenue insight of a product to the businesses. The knowledge of the market's potential is essential to determine whether to jump into the business of the product, even if it is a new solution to a concern or a reformed version of a pre-existing product.
• Top-down approach - A macro approach to TAM calculation is where you take the third-party data to estimate how much revenue generation is possible for your product. Suppose the product has an already existing market. In that case, using the top-down approach is more reliable because lots of data is already present in the market, so estimation of the serviceable addressable market becomes easy. It generally takes less time to calculate and provides an overview to make quick decisions about the product’s business.
Suppose you want to enter into the business of providing digital marketing services. Through third-party research, you find out that annual spending on digital marketing is ten billion dollars. You only deal with email marketing which estimates at 2.2 billion. Therefore, if you think 2.2 billion is a huge opportunity to grow in email marketing, considering other competitive factors of the market, too, then deciding on getting involved in this online promotional services business becomes easy.
• Bottom-up approach - It gives a more specific analysis of the TAM because the estimation of the market is more filtered and related to your product. If the product is new, the bottom-up approach is more suitable. Bottom-up follows, taking into account the smallest unit of the customer and their average annual spending on a product.
E.g., if the total number of customers that spend on getting a well-researched email marketing services is 1 million, and their average expenditure is 26 dollars, then the TAM calculation will be -
Both top-down and bottom-up are important to determine the size of the market and check its feasibility. Both approaches should be used to estimate the market size. The lesser gap between both methods is significant for efficient TAM calculation.
Serviceable addressable market - While TAM is estimated to understand the potential of a product's business and define its market size, a serviceable addressable market is the extent of the market a company can serve to. Any business cannot fully achieve both TAM SAM. It is calculated to define the growth opportunities and potential of the product in revenue generation in a market. A business can't capture 100% of a product market due to several factors, including demographics, the company's budget, competitors, different rules and regulations, government policies in different geographical locations, etc. There are many limitations and also it is highly unrealistic for any company to reach its TAM.
Let's take an example for more clarity. Suppose the global market (total addressable market) of social media marketing is $2 bn dollars. Now you want to start a business offering social media marketing services in the USA. So, the USA is your serviceable addressable market.
Most businesses can't target the whole serviceable addressable market citing many factors that include -
• The risks attached to a new business.
• Presence of the competitors.
• Scarcity of budget.
• Geographical accessibility
Estimating SAM is critical as it defines the extent of growth a business can achieve within 4 5 years of operations if it does well in the serviceable obtainable market. The more portion of SAM a brand can achieve, the more profitable and successful it becomes.
Serviceable obtainable market - When you identify the growth and opportunities of a business, the TAM SAM starts its conductivity. It doesn’t necessarily guarantee success, no matter how massive an amount the TAM SAM represents. SOM is the actual market within SAM you are going to serve. It is the segment of your serviceable addressable market that you can realistically render your services and provide a good user experience to expand your business and extend the boundaries of your SAM. The serviceable obtainable market is the phase of trial and error to improve the operation of the business and achieve the estimated return on investment. Capturing 100% market share of any product by estimating their TAM SAM is highly unlikely, so the aim of your business should be to achieve the maximum market share of the full potential. Suppose the business operations are optimum and effectively executed at the ground level, i.e., within the serviceable obtainable market. In that case, it is natural and understood that the user experience would be positive. Your business will be able to increase the boundaries of SOM with time.
TAM SAM SOM and digital marketing
The scope of digital marketing is expanding with every passing day. The increased popularity of online mediums and the use of modern, effective marketing tools, i.e., SEO marketing, PPC marketing, email marketing, content marketing, social media marketing etc., have shown its usefulness and its wide reach. With the growing internet market and the covid-19 giving a further boost to the digital ways of marketing, the TAM of digital marketing is constantly extending its boundary and putting forward an enlarged radius of opportunities to whosoever opts to leave a mark on digital marketing services. It is not wrong to say that online marketing is one of the continuously booming industries that haven’t unleashed even half of its potential yet. It is very difficult to calculate the TAM SAM SOM of this industry as there is a continuous growth in demand for utilizing these online services to promote products as well as brands.
According to a report, the market capitalization of SEO marketing is expected to grow from $40.92 billion in 2021 to $83.7 billion in 2025 and this is just the market size of SEO. If we include other digital marketing services, collectively, it will become huge and so does the total addressable market of digital marketing. Every online marketing service has its own addressable market. Calculating it is a hectic task because the internet has encountered a continuous growth in its users, making it very much preferable for firms to opt for digital marketing in promoting their products. So, contemplating the TAM SAM SOM of digital marketing becomes very important for any brand that decides to leave a mark in these marketing methods and give themselves a chance to ponder on the opportunities online marketing holds.
Conclusion
TAM SAM SOM is important when starting a new business or an established business. Identifying the market's size is essential for running any industry. It removes the confusion and doubts about the business's future with respect to a particular product and helps decide whether to enter this product market or not. The size of the total addressable market and the serviceable addressable market doesn't guarantee the success of any business because they are just indicators of the amount or maximum revenue a product business can generate.
The essential task of a company that decides to enter into the business of a new or already available product after estimating the TAM SAM is to perform effective business and provide a satisfactory user experience in their serviceable obtainable market. Conducting good business operations in SOM provides the base for expansion, i.e., capturing more share of SAM and expanding the SAM's boundaries because of constant growth. Companies will never acquire 100% of the market share of any product. Still, good conduction of business activities in the areas within their reach will maximize their market capitalization.
Considering the market's significant metrics, i.e., TAM SAM SOM, entering into a demand-supply revenue activity is essential to running a successful business. Other influential factors are involved in the decision-making to initiate a business, but identifying the market size and its favourability is a primary factor that these market size calculators considerably solve.
References:
• Market research: What it is and how to do it
• How to do market research: A guide and template