learn how to define the market size of your business – WAU

TAM, SAM and SOM are acronyms that represent different subsets of a market. Through them, entrepreneurs are able to predict the demand they will have for their products or services, projecting sales and growth.

In a project, in addition to being clear about who the target audience is, it is essential to have knowledge about the number of customers that may be impacted over time.

Otherwise, it will be very difficult to make predictions or even develop a good business plan. This is precisely the objective of the TAM, SAM and SOM concept: measure the size of your market.

In this post, we will study the 3 types of market classification, seeing examples of each. You will also learn how to make this assessment and what are the best ways to explore these different opportunities.

At the end of the content, your company will be able to plan the future realistically, taking the necessary steps to be increasingly successful. Enjoy reading!

What is the TAM, SAM and SOM concept?

TAM, SAM and SOM are acronyms that represent different subsets of a market. Through them, entrepreneurs are able to predict the demand they will have for their products or services, projecting sales and growth.

TAM (Total Available Market)

Represents the total market demand for a product or service. Exploring this market requires a high sales and distribution force, in addition to a global presence. To create this number, it is necessary to combine the revenues of all companies in the market being analyzed.

For example, if the total number of software licenses sold per year is US $ 200 million and the average ticket for this market is US $ 5,000, TAM is US $ 1 billion.

However, this is a gigantic sea and, certainly, a single company will not be able to “grab” the entire market – not least because we are talking about world values. That’s where SAM comes in.

SAM (Serviceable Available Market)

It is the part of TAM that is in its geographical reach. That is, is the slice that your company really has the potential to reach in the coming years, considering the regionalization, specificities of your product and the growth of the market itself.

As it is a more focused market (although it is still quite large), it is possible to explore it in the medium or long term, as long as you have a highly scalable model.

Using the same example above, let’s say that you work with CRM software for SMEs and that they represent 10% of the market – the other 90% are made up of other types of solutions or programs for large corporations. In that case, the SAM would be $ 100 million.

SOM (Serviceable Obtainable Market)

It is the part of SAM that you can achieve, that is, a realistic acquisition forecast. It takes into account as many variables as possible, such as competition, distribution, sales channels, location and any external influences.

This is the ideal market to start. To explore it, the ideal is to give up trying to sell to all types of public. On the contrary, it is necessary to concentrate efforts on a persona, a specific ideal client.

Following the example, how much of the $ 100 million of the software market does your company really have the resources to seek? Consider that it will be necessary to start with London, build your sales team, promote the brand, etc.

You may be interested in these other content about market segmentation and management!
Market segmentation: how does it impact my strategy?
Target audience and personas: understand the difference and how to apply
Local marketing: understand how to attract the public to your small business
SWOT Analysis or F.O.F.A Matrix: what it is and how to do it [templates]

Why is it important to know the size of your market?

Running a company knowing the size of its market is much safer, as it becomes possible to work with realistic numbers and projections. As a consequence, strategies and decision making are also more accurate.

He wants to better understand the importance of these estimates. Below, we present 3 benefits of knowing the size of your business market.

Focus increase

Regardless of the market, it is practically impossible to serve all customers. That is why, hardly the total size of the market will be the objective of its performance. This could even generate an absurd lack of focus. So, to focus on what really matters, you need to understand the market share you can operate with.

Resource savings

By focusing on a part of the market that will really be possible to serve, your company stops wasting resources. After all, when trying to please everyone, what happens is a waste of marketing, distribution and sales efforts. So knowing exactly who you intend to look for as a customer makes all the difference in costs.

Attractiveness to investors and partners

Between us, nobody wants to do business with a company that doesn’t know the numbers of its own market, is it? Nowadays, it is very common to see new organizations presenting inflated or unrealistic numbers.

This scares investors and creates a lack of confidence and brand credibility. On the other hand, treating the business realistically is a sign of preparation and maturity.

How to do the TAM, SAM and SOM classification?

There are, basically, 2 ways to do this classification. Follow!

Top-down

In this model, the information (or most of it) about the size of the sector comes from an organization, research, from some segment participant or from a market analyst. These data are usually released free of charge on the internet and can be found on search engines.

The top-down is often used to estimate TAM. You will hardly be able to reach specific numbers for SAM and SOM using only third party data.

Bottom-up

On here, data is built internally, upwards”. You can start by identifying the number of customers in your segment and multiplying them by the average revenue. Part of this information can be found in reports from publicly traded companies.

Then, you will need to consider all the bottlenecks and bottlenecks that can prevent your business from serving this total audience. For this, it is worth observing the business plan itself, doing research, excluding customers who are not your persona, and so on. In general, the bottom-up strategy is used to define SAM and SOM.

As we saw in this post, a company gains much more focus and growth power when it understands the size of its market and directs its efforts to expand gradually. For this, once again, it is essential to know your audience and work on communication to reach those who are really interested in becoming your customer.

With that in mind, take the time to read the High Performance Marketing and Sales material. With it, you will be able to expand your company even more, taking advantage of the different markets: TAM, SAM and SOM.