The art of understanding and calculating your market size - Market sizing is all about potential

To make Healthy business decisions you must have a fair understanding of the market you are occupying. Knowing the market size that you can attract aids with setting realistic goals and profit broadcast. This step is also important when branching out to new cities or countries, expanding into a new vertical, or launching a new product or service.

The TAM SAM SOM model helps you map out your market size and aids with calculating the market share that you want to capture. This model can also be used to prepare an investor’s pitch, business plan or drawing out sales strategies. This is the model that helps you to identify what your market target will be. 

We are going to explain the model as well as use an example to make the information clear and simple. Our example is a company that provides ebikes within the hospitality industry at Hotels to be more specific.

What is TAM SAM SOM

They are acronyms that describe the different types of markets 

TAM represents the Total Addressable Market. How big is the Market that you could reach with your product or service? It also represents the maximum revenue that you could make if you are able to capture 100% of the market by selling your product or service. It is important to Identify your TAM first before setting a go-to-market strategy as it illustrates the potential of a new product or business venture. 

• For our example: When we take the ebike company, they can start by looking into how many hotels there are worldwide. To put it into perspective it is estimated that there are over 700.000 hotels worldwide. 

SAM Is a smaller subset of TAM that represents the Serviceable Available Market. How big is the market you could reach now? It represents the market that you are actually able to reach due to limitations or specialisations such as location or target group. Although it is a limitation It will make your sales target segments more precise which aids in setting up efficient and well-targeted sales campaigns.

• Continuing with our example: the ebike company they are not located in every country in the world they are located in Belgium therefore their SAM are all the Hotels that are located in Belgium which are about 1505 hotels. 

SOM: This is a smaller subset of your SAM that represents the serviceable obtainable market. The SOM takes additional factors into consideration such as current resources and competition, What is the market you can reach with your current resources? It can be used to illustrate the potential market in a short time with your current resources. When it comes to resources we can take into consideration: staff, money, brand coverage, competition, location, and logistics.

• Completing our example: the ebike company we mentioned in our SAM is located in Belgium adding to our SOM elements of current resources they are located in the East Flanders province and their salespeople can extend their reach to covet the Flemish region. Taking these limitations into account we end up with about 864 Hotels.

How to calculate TAM There are three ways to calculate TAM:

1. Top-down, using industry research and report
2. Bottom-up, using data from early selling efforts
3. Value theory (based on assumptions about customer willingness to pay)

Top-down approach

This approach starts with the biggest size market and reduces in size based on data and assumptions as well as studies within your industry.

Ofcours there are limitations to this approach as the industry data might not be as accurate or up to date. It can also be the case that the market data does not take into consideration certain characteristics that make your company stand out within the market space.

Bottom-up

This approach depends on previous pricing and sales data. Where you divide the average sales price by the number of current clients to reach the value that indicates your yearly value of contact. Then, divide the yearly value of contracts by the number of clients which results in the Total Addressable Market 

Your Annual Contact Value AVC * number of customers for the entire segment of the targeted market. AVC is calculated by multiplying your average sales price by the number of your current clients. 

(You own a fragrance company that distributes your fragrance products to beauty supply stores in your state. Your product costs an average of $95/bottle, and you sell an average of 100 bottles to each store. 100 * $95 gives you an ACV of $9,500. You’d then multiply your ACV by the total number of beauty supply stores in your state (150) for a Total Addressable Market of $1,425,000)

Value Theory 

This approach sheds the focus on adding value to capture the market. Where you asses the value that your product or service will deliver to your potential clients and how much the client will be willing to pay for that value.

 Let us take an example of a bicycle shop, the TAM (Total Addressable Market) would be the global bicycle shop market. However, this is only a possibility if you are located in every country in the world and you are the only bicycle shop as in there is no competition. Therefore we get into SAM (Serviceable Available Market) as it represents the demand for the bicycle within your reach let's say it is one country and you are the only one in that particular country. That is where we transition into the SOM (Serviceable Obtainable Market) You can not have the entire market as there are other competitors that totals to the specific market that you can supply 

Why use TAM SAM SOM

• Helps you take steps to evolve your product or service
• It gives a clear insight into the potential market
• Set up more effective sales strategies
• Build effective campaign segments
• Dynamic targeting
• Estimate potential profit