How can I calculate TAM SAM AND SOM?
TAM SAM SOM help companies and their investors understand the market size and potential for growth and expansion. In the following questions and descriptions of different blogs and experts are summarized to help you calculate TAM, SAM and SOM.
TAM – Total Addressable Market – Long Term View
In one sentence: The entire potential market independently from your ability to reach and serve it yet. Similar to assuming a monopoly.
- How big is the largest possible market?
- Total market for your product
- Value of the entire market
- Total possible market/demand for your product or service, without limitations based on geography, distribution or product limitations
- Who could (in purely theoretical terms) buy the product?
- Revenues that would be possible if the company had a monopoly
- For the calculation of TAM, all factors that could prevent the company from achieving this state are disregarded. In particular, competitors, capacity constraints in production or supply, language barriers or geographical distances
SAM – Serviceable Addressable Market – Medium Term
In one sentence: Portion of the TAM that you can actually reach with your product or service (typically limited by geography and demographics or your capabilities)
- Portion of the market you can acquire based on your business model
- The people you can actually serve and reach with your business
- Market that can be addressed in principle with the current business model.
- Shows medium-term potential of the business idea
SOM – Serviceable Obtainable Market – Short Term
In one sentence: Part of the SAM that a company can actually achieve within a specified period of time
- What proportion of that market can you reach?
- Percentage of SAM you can realistically capture
- The share and portion of the market that you can capture
- Portion of the SAM that you will acquire with your product or service
- SHORT-TERM target
- the portion of the market you are aiming to capture, which should be aligned with your market share target, ideal customer profile, and sales territory maps
- What sales are achievable in the initial growth phase of the business
- Shows who is served with the value proposition, who is reachable with the initial marketing and distribution, current competitive situation and initial production capacity
- The main differences between SAM and SOM are the competition and in MedTech regulatory and quality management constraints that need time
- Short-term market share within the next 1-3 years
- “Remember that recipients will be as interested in the numbers as in how you developed the model: Was the company realistic when building their model?” (Jean-Francois Denault, Linkedin, 29/09/2017)
- As a rule of thumb, forecasting a SOM for life science startups, which is greater than 10% of the SAM is going to require a great deal of justification. (acc to Jean-Francois Denault, expert in market research for life sciences)
- To calculate your TAM SAM SOM you can also use the founders-playbook market size examples: http://founders-playbook.de/wp-content/uploads/Arbeitsblatt-2_2_1-Market-Size.pdf
- new fair trade coffee
- TAM: everyone who drinks coffee everywhere in the world
- SAM: Distribution start in US, so high-end coffee drinkers located in the US
- SOM: Your share of those high-end coffee drinkers (as you are not the only coffee seller and other competitors are in the market)
2. Game app for the iPad that children can use to build their German vocabulary
- TAM: all tablet owners worldwide who want to improve their vocabulary
- SAM: all parents of school-age children and schools in DACH region who own an iPad
- SOM: all parents of children in their first year of school in Germany who own an iPad and want to actively support their child
3. Rental for household tools
- TAM: all households in rich countries
- SAM: all households in France
- SOM: all homeowners in Paris
4. Example with figures
- TAM = 1,2 Mrd. €
- SAM = 55 Mio. €
- SOM = 3 Mio. € profit after two years and 6 Mio. € profit after 4 years