Are you familiar with the TAM, SAM, and SOM model?

Have you heard of the TAM, SAM, and SOM model? These acronyms are essential for any entrepreneur or company looking to understand their market and expand their operations effectively by identifying who might be interested in their product or service and to what extent. This model provides an effective methodology for evaluating and segmenting the potential users of a startup or company.

These metrics not only help identify and quantify the market potential of your project, product, or service, but also facilitate strategic decision-making. In this post, we will delve into what TAM, SAM, and SOM mean, how to calculate them, and why they are indispensable for driving the growth and success of your startup.

The TAM, SAM, and SOM model is used to estimate market size at different levels, starting from the Total Available Market (TAM), moving to the Serviceable Available Market (SAM), and finally reaching the Serviceable Obtainable Market (SOM). These three hypotheses are progressively structured in terms of focus and help you understand the potential reach of your project.

This analytical framework is a valuable starting point for any startup, whether in its initial phase or more advanced stages. The model allows you to assess the size of your target audience and determine if your business is financially viable from the project's inception. Additionally, when launching a new product or service, this analysis helps you understand the expected demand and competition. Continue reading to learn more about this model.

The TAM, SAM, SOM technique is structured as follows:

• Identification of the target market. Identify the segment you want to enter.
• Definition of TAM. Determine the Total Available Market (TAM) for the target market. This involves calculating how many people or entities could be potential customers, without considering limitations like prices, competition, or production capacity.
• Definition of SAM. Define the Serviceable Available Market (SAM) that your company can address. This includes considering factors such as existing competition, your company's ability to meet demand, and available resources.
• Definition of SOM. Specify the portion of the SAM that your company has the potential to capture and maintain as a significant share.
• Strategy development. Use the results obtained to develop new strategies. For example, if the SOM is smaller than expected, you might consider expanding your company's reach or diversifying your offerings to reach a broader market.

But... what are TAM, SAM, and SOM, and how are they calculated?

TAM (Total Addressable Market) is a measure of the total market available for your product or service if you were to achieve 100% market share. In other words, it is the theoretical estimate of the total number of people or businesses that could be interested in purchasing your product or service. It’s important to understand that TAM is an estimate of the total audience size and does not mean that everyone in that market will necessarily buy your product or service. However, knowing it will help you plan and make important strategic business decisions.

For example, if you have an online learning platform offering a course in technology and digital skills, the TAM encompasses the global online education market.
To calculate it, you need to estimate the annual demand for your product or service and multiply it by the average price. This provides a clear perspective on the total available market size for your offering, allowing you to properly scale your business and set realistic penetration goals.

TAM = Annual Demand x Average Price

SAM (Serviceable Available Market) represents the specific segment of the market that your company can effectively reach and serve with its current resources and capabilities. This is a subset of the TAM and is calculated by considering factors such as your company's production and distribution capacity, available resources for marketing and promotion, competition, your company’s geographic location, and market trends.

Understanding SAM is essential because it allows you to strategically focus your resources on the most suitable market segment for your business. This way, you can maximize your growth potential and increase your chances of success.

Continuing with the example of the online learning platform, if it only offers courses in English, it focuses its efforts on English-speaking students. Therefore, the SAM corresponds to the online education market in English-speaking countries or English-speaking individuals.

This involves two fundamental steps: first, identifying the total demand for your product or service in a given geographic area; second, determining the percentage of the market that the company can effectively serve. This percentage is based on production capacity, distribution, and other available resources, multiplying the total market size by this percentage.

SAM = Total Market x Percentage of the market that can be served

SOM (Serviceable Obtainable Market) is the portion of the SAM that your company can realistically capture, considering current resources, competition, and capabilities. In other words, SOM represents the segment of the market that the startup can effectively reach within a specified period, based on factors such as production capacity, delivery capability, distribution channels, pricing strategies, marketing, and more.

By knowing your SOM, you can identify growth opportunities and design strategies to increase your market share, as well as meet your customers' needs more effectively. This means analyzing your ability to compete and gain market share within the SAM. This includes evaluating your marketing strategy, sales force, and the competition.

Returning to our example, within the English-speaking user base, the platform targets a specific audience of professionals seeking to improve their digital and technological skills. Considering the current resources and marketing strategies, you will be able to attract a fraction of this group looking for tools to enhance their skills.

SOM involves analyzing your marketing strategy, sales force, and market competition. The basic formula for calculating SOM is:

SOM = SAM x Market Penetration x Market Share

Remember, this model can be useful at any stage of your startup. Mastering these concepts prepares you to navigate the competitive business world effectively and take your product or service to the next level.