Market Sizing for SaaS Success: Understanding TAM, SAM, and SOM
A Practical Guide to Calculating Your Total, Serviceable, and Obtainable Markets
Have you ever wondered why some startups manage to attract millions in investment while others, equally innovative, struggle to raise capital? The answer might lie in three acronyms that every entrepreneur should know: TAM, SAM, and SOM. These metrics are not just numbers in a presentation; they are the compass that guides investors and founders to understand a company's true potential in the competitive world of SaaS.
In an ecosystem where 90% of startups fail, the difference between success and failure often lies in understanding not only the total size of the market (TAM), but also what portion of that market we can serve (SAM) and, more importantly, conquer (SOM). Join me on this journey to discover how these metrics can transform the way you view and present your business.
TAM (Total Addressable Market)
Represents the broadest potential market for your product or service. That is, it includes all potential customers regardless of geographic, demographic, budget, or product limitations.
Example: If you sell business management software, your TAM could be all the companies in the world.
How do you calculate the TAM of a specific market?
To calculate the Total Addressable Market (TAM) of a specific market, follow these steps:
Identify the global market: Determine the total market for your product or service worldwide.
Calculate the annual demand: Estimate how many units are sold or expected to be sold each year.
Determine the average price: Find the average price at which the product or service sells.
The formula is:
AAR = Annual Demand × Average Price.
For example, if the annual demand is 100 million units and the average price is 5 euros, the TAM would be 500 million euros.
SAM (Serviceable Available Market)
This is a more realistic portion of the TAM. It refers to the market segment that your company can reach with its current products and services, considering factors such as:
Geographic: Regions or countries where you can operate.
Demographic: Age, gender, income, etc., of your ideal customer.
Technological: Compatibility with operating systems, hardware requirements, etc.
Competition: The presence and strength of your competitors in different segments.
Example: If you sell business management software, your SAM could be all medium-sized companies in Latin America.
What factors influence the SAM calculation?
Several factors influence the calculation of the Serviceable Available Market (SAM):
Market segmentation: identify specific segments within the SAM that align with the business model and products offered.
Demographics and location: Consider demographic and geographic characteristics that affect product accessibility and demand.
Competition: Evaluate the number of competitors and their market share, which helps adjust uptake expectations.
Brand recognition: Brand perception in the marketplace can influence the ability to attract customers.
Marketing budget: Marketing investment determines the ability to reach and engage potential customers.
SOM (Serviceable Obtainable Market)
This is the portion of the SAM that your company can realistically capture, considering factors such as:
Sales and marketing force: Your ability to reach customers and close sales.
Brand positioning: Customers' perception of your brand and products.
Pricing strategy: The competitiveness of your pricing relative to the competition.
Financial resources: The budget available to invest in sales and marketing.
Example: If you sell business management software, your SOM could be the 100 most important medium-sized companies in Mexico City.
How do you determine the SOM of a market?
To determine the Serviceable Obtainable Market (SOM), follow these steps:
Calculate the SAM: Start with the SAM, which is the available market you can serve with your product or service.
Establish market penetration: Estimate the percentage of customers within the SAM that you can capture. This can be based on historical sales data or market research.
Define market share: Consider the proportion of the total market you expect to capture in a specific period.
The formula is:
SOM = SAM × Market Penetration × Market Share.
For example, if your SAM has 100,000 customers and you expect to capture 30% of them, with a 10% market share, your SOM would be:
SOM = 100,000 × 0.3 × 0.1 × 0.1 = 3,000.
This will give you a clear estimate of your achievable target market.
Why are TAM, SAM, and SOM important?
Strategic planning: They help define realistic objectives and develop effective marketing and sales strategies.
Investment attraction: They are key metrics to present to investors and convince them of the viability of your business.
Decision-making: They allow you to evaluate the profitability of different business opportunities and allocate resources efficiently.
The journey of understanding your market through TAM, SAM, and SOM is more than a numbers exercise; it is a deep exploration of your company's real potential and an invaluable tool for strategic decision-making. As an entrepreneur in the SaaS space, your ability to articulate these metrics will attract investment and help you build a more resilient and focused business.
Have you calculated the TAM, SAM, and SOM for your startup? I'd love to hear about your experience in the comments. What interesting discoveries have you made when analyzing these metrics? What challenges have you faced? Share this article with other entrepreneurs who could better understand their potential market and join the conversation. Your perspective might be exactly what another founder needs to hear.
Note:
Calculating TAM, SAM, and SOM requires market research and data analysis.
These numbers may change as the market and your company's strategy evolves.
References
Amazon Ads. (s. f.). TAM SAM SOM: qué significa y cómo calcularlo. Amazon Ads. Recuperado de https://advertising.amazon.com/es-co/library/guides/tam-sam-som
Chase. (s. f.). El primer paso hacia el éxito de tu negocio: Calcular tu TAM. Chase Business. Recuperado de https://www.chase.com/es/business/knowledge-center/start/determining-your-total-addressable-market-tam