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How to Use TAM, SAM, SOM to Determine Market Size

Understanding the market size is pivotal for any entrepreneur looking to launch a new product or service. It gives you a clearer picture of the potential revenue opportunities and helps in making informed decisions about market entry and resource allocation. The concepts of Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) are essential tools in this analysis.

This guide will explain how to calculate and use these metrics to determine your market size. Let’s dive in!

Understanding TAM, SAM, and SOM

  • TAM (Total Addressable Market): The overall revenue opportunity available if a business achieved 100% market share.
  • SAM (Serviceable Available Market): The portion of TAM that can be served by your products or services within your geographical reach.
  • SOM (Serviceable Obtainable Market): The portion of SAM that you can capture, considering current competition, market conditions, and your capacity.

Define Your TAM

Start by identifying the broadest potential market for your product or service. This involves understanding who could potentially use your solution, regardless of the current market limitations or your business’s capacity.

  • Example for a Hair Salon: The TAM could be all individuals seeking hair care services in the city, the SAM might be those seeking high-end services, and the SOM could be professionals in the downtown area looking for organic hair treatments.
  • Example for a Fitness App: For the fitness app, the TAM could be all individuals interested in fitness apps globally, the SAM might be those in countries you plan to operate in, and the SOM could be busy professionals in those countries looking for quick workout solutions.

Narrow Down to Your SAM

Next, refine your focus to the market you can actually serve with your current business model and distribution channels. This step requires a more detailed analysis of your target demographics and operational geographies.

  • For a Fitness App: If the app focuses on high-intensity interval training (HIIT), the SAM narrows to those who prefer HIIT over other fitness methods and can access the app through their devices.
  • For a Hair Salon: If the salon specializes in luxury hair treatments and eco-friendly products, the SAM would include individuals in the area who prioritize premium, environmentally conscious hair care services.

Calculate Your SOM

Your SOM is your realistic target market share in the short to medium term. Assess your competition, market entry barriers, and your business’s unique value proposition to estimate this figure.

  • For a Fitness App: Considering the competitive market of fitness apps and the specific target demographic (e.g., young professionals aged 20-35), the SOM might be the achievable market share within this group, given the marketing budget and current brand recognition.
  • For a Hair Salon: For a newly opened salon in a competitive urban area, the SOM could be the number of eco-conscious clients it can realistically attract in its first few years, considering local competition and marketing efforts.

How to Calculate TAM, SAM, and SOM

The calculation of TAM, SAM, and SOM involves a combination of market research, industry reports, and financial models. You can use a bottom-up approach, starting with specific data points like sales figures or pricing models, or a top-down approach, using broader industry data and applying percentages to hone in on your market size.

Calculating TAM, SAM, and SOM for a Fitness App Salon

Calculating TAM

To calculate the TAM for a fitness app, identify the total global population interested in fitness apps. Assuming there are 1 billion people worldwide with interest and access to smartphones or computers for fitness purposes, your TAM would be:

  • TAM: 1 billion people

Calculating SAM

If your app specializes in high-intensity interval training (HIIT) and you initially plan to launch in English-speaking countries only, you must consider the population of these countries interested in HIIT. Assuming 20% of the smartphone-owning population in these countries is interested in HIIT, and there are 300 million such individuals, your SAM would be:

  • SAM: 60 million people (20% of 300 million)

Calculating SOM

Assuming you can capture 1% of the SAM in the first few years due to competition and market penetration efforts, your SOM would be:

  • SOM: 600,000 people (1% of 60 million)

Calculating TAM, SAM, and SOM for a Hair Salon

Calculating TAM

To find the TAM for a hair salon, determine the total number of people seeking hair care services in your country. If the population of your country is 100 million, and surveys suggest that 60% of the population visits a hair salon at least once a year, your TAM would be:

  • TAM: 60 million people (60% of 100 million)

Calculating SAM

If your salon is located in a metropolitan area with a population of 2 million, and you offer luxury and eco-friendly hair treatments that appeal to roughly 10% of the city’s population, your SAM would be:

  • SAM: 200,000 people (10% of 2 million)

Calculating SOM

Considering the competitive nature of the salon industry in metropolitan areas and your marketing strategies, if you estimate to capture 5% of your SAM in the first few years, your SOM would be:

  • SOM: 10,000 people (5% of 200,000)