TAM, SAM & SOM Explained: What They Are, and Why They Are Important For Your Business Plan
Last updated on July 21st, 2020
When trying to read and understand market analyses, it sometimes feels like reading a different language. There are several acronyms and jargon involved that it can take a while before you fully get your head around a simple concept. In conducting market research, you may have encountered the acronyms TAM, SAM, and SOM, but what do these letters actually mean?
In this article, we simplify what TAM, SAM, and SOM mean, why it’s important to understand these concepts, what value do they give to your business plan, and how you can best present these concepts during your presentation.
What are TAM, SAM, and SOM?
A crucial part of your business plan is understanding your target market. Your analysis of your market can help you answer questions like: is there a big enough market for my business venture? What portion of the market can I realistically capture? And how much potential is there for my business to grow?
Your market reach can help you set your business and revenue goals in terms of market reach, as well as guide your long-term strategies on how to expand your business. One important concept you need to include in your analysis is the TAM, SAM, and SOM. These three acronyms represent different subsets of a market.
TAM – Total Addressable Market
The Total Addressable Market refers to the total demand for the product or service that your business provides. If your product or service theoretically enjoys a 100% market share, the TAM is the maximum limit of revenue that a business can attain from that market.
The TAM is a more abstract concept since it is a big market that is difficult to quantify. In market analyses, it usually pertains to the general market that your business wants to penetrate. The TAM shows whether or not there is a big market for your product or service, and if it shows an increasing demand and a potential for growth.
For example, if your business venture is a laundry shop service, then your TAM would be the nationwide or global population that is looking for such a service.
SAM – Serviceable Available Market
Now, unless you are operating in a monopoly, you won’t be able to capture the whole arena of the laundry shop market. The Serviceable Available Market, or SAM, is the fraction of the TAM that is within your reach, and this is the specific market that you’re targeting with your product or service.
The SAM will be limited by a lot of different factors, like your business’s geographic location, your market’s demographics, as well as the availability of your resources. Identifying your SAM requires that you narrow down and segment your customers into who you can realistically reach.
Going back to the laundry shop example, your initial SAM could be busy and middle-class individuals looking for a laundry service within the city, particularly college students, young professionals, and other customers in their early twenties. Once you start planning on expanding your business, your SAM also expands to include other geographic locations or demographics.
SOM – Serviceable Obtainable Market
Narrowing it down further, you won’t be able to capture your entire SAM. You may have a lot of competing businesses to divide the market with, and not every customer will choose your service over the other competing businesses. The Serviceable Obtainable Market, or SOM, is the portion of the SAM that you can realistically reach. In other texts, SOM also means Share of Market because this is the projection of the market capture that you wish to attain. It also predicts the revenue that you can generate within this specific market.
The SOM is what comprises your target market in the short term. It’s primarily affected by the reception of the customer to your product or service and the strength of your competitors in the field. More importantly, you need to factor in the effectiveness of your marketing plan to reach a sizable portion of the market.
In the laundry shop example, your SOM would be the portion of your busy, middle-class market that will most likely patronize your service, like those individuals that live nearby your laundry shop. It may also include customers from farther away that you have successfully reached with your marketing strategies.
Why is it important to identify these markets?
Market analysis identifying your business’s TAM, SAM, and SOM provides great insight when analyzing whether the business venture is profitable or not. Understanding the SAM and the SOM narrows down your target so that your marketing strategies are more focused and effective. Your marketing plan must be centered upon reaching your SOM through strong and results-based strategies, while expansion plans must be geared towards capturing a larger portion of the SAM.
The TAM is important in assessing the business’s profitability and potential for growth. The demand for the product or service must be big and continuously growing to be favorable. Venture capitalists and other investors especially look at the TAM when considering your business, because they want to invest in ventures that have high upside potential.
How do you present the TAM, SAM, and SOM in your presentation?
Because investors pay close attention to your TAM, SAM, SOM analysis, it must be clearly presented during your business pitches. These market subsets must be discussed along with the research, statistics, and other analyses that you have utilized. Some crucial elements that must be included are the customer demographics, market segmentation, and relevant market trends and projections. It must be presented concisely yet informative and backed by research.
A clean, professional PowerPoint presentation may be just the thing you need to secure your investors’ approval. Our roster of PowerPoint templates are free to use and are designed to help you express your ideas elegantly and professionally.
The TAM, SAM, and SOM are essential parts of the market analysis to focus your marketing strategies on solving your short-term goals, as well as to guide you in your business’s long-term plans of expansion. But just as important as conducting insightful market analysis is professionally presenting your analysis to your team and potential investors. Find the perfect free business PowerPoint template from our collection for an outstanding presentation.