TAM SAM SOM: fundamental market size metrics in your business plan
An evaluation of business market size is very important to understand how far a business can go through. TAM SAM SOM is the perfect market-size metrics when it comes to measuring the viability of the business.
What is TAM SAM SOM?
TAM (Total Available Market)
TAM stands for the total market demand available for your product or services. Holistically, it defines the maximum available demand for the market.
SAM (Serviceable Available Market)
SAM is the portion of TAM, which falls under your reach because of business model or geographical limitations.
Realistically, it is not possible to capture 100% of the TAM as the business model and its parameters restrict it.
SOM (Serviceable Obtainable Market)
SOM is the total obtainable market that you can obtain based on your business capacity and ability.
It is a very realistic approach to understand and predict the net market available, serviceable, and obtainable for the product and services.
The business model and product line define the market size. The potential carries to capture the greater market at the initial level can help in raising the fund. TAM SAM SOM is used by investors as a tool for measuring the market size.
To understand let’s go through this example
Suppose a software development company launched its SaaS-based applications for supply chain & logistics companies with better functionality and smoother operations. The company targeting small e-commerce and food delivery startups is for now.
By taking the above example and molding it into our market size metrics tool, the supply chain & logistics company across the world is potential TAM (Total Available Market). The companies product line is directly associated with all the businesses in the supply chain & logistics.
There are many business limitations because of which the total available market further narrows down. Despite all the supply chain & logistics companies across the world is a total available market, geographical boundaries reframe it to country-specific or under the serviceable area. In such a case, the companies available in a serviceable geographical region becomes SAM (Serviceable Available Market).
The companies product line further defines the SaaS-based applications for small e-commerce and food delivery startups exclude the others who don’t fall under this category. The food delivery and small e-commerce startup under the geographical boundary become the obtainable market for the company, so-called SOM (Serviceable Obtainable Market).
Realistically, a very small portion of the TAM company capture based on a business model and product line. At the same time, the potential market is available and accessible if the company expands and broadens its serviceable range.
Why it is so important and where it applies?
Generally, when any investor stepping into investing in the startup, they use the same metrics to understand the potential and risk involved in it. An investor wants risk-free early investment in your present captured market and also wants to invest in an opportunity that gives a better potential market.
If the company performing better in SOM then it opens up the SAM leverage too. So if a company takes better advantage of the present market size under their capacity then it opens up its potential to serve a large market size.
Investors evaluate the businesses based on these metrics and also some of the major objectives. Let’s understand what are the objectives which help an investor to pour money into your business.
Building and designing a successful product line which people will love and want to buy knock the deal most of the time. However, the potential leverage into the further development of the product and passing the advantage to the end consumer compliment the success.
Marketing Plans & Distribution Channels
Initially, any product, its benefits, and features are not known to the target market. It required a well-defined marketing plan to make the target market aware of products & services. Smooth and effective distribution channels supplement the business growth at increasing speed. Shorten the manufacturing to making it available to the end consumers leverage the business.
SAM and Market Competition
Reasonable market capturing interests investors to put an attractive deal on your table. Whatever your SOM market captured should be reasonable to your SAM (Serviceable Available Market).
The business achieves short tern business potential or Serviceable Obtainable Market (SOM) which means the business is capable and credible and potentially ready to expand the market size.
If your business delivers reasonably in SOM then it opens up further leverage to your business to cater for SAM. Ultimately, it secures the investment by earning enough return and lets the investor look for stepping in SAM by securing attractive investment return.
If the business shows good performance in SOM and SAM then investors open an eye for the broader phase to TAM. It is the best tactic to entering into the bigger horizon step by step while securing the investment too.