Starting a new company is exciting. So is gauging an industry’s profit potential or forecasting a revenue goal for your business. But as you start calculating, you must remember to root these figures in reality.
If you don’t, you could enter a market that doesn’t have a large enough market size to convince investors to back you, or you could set an unrealistic revenue goal for your business and burn your employees out.
To help you avoid these issues, we’ve put together a guide that’ll teach you exactly how to calculate your industry’s total addressable market, serviceable addressable market, and share of market.
These metrics are key components of a business plan, particularly as you craft your marketing and sales strategy, set realistic revenue goals, and choose to enter the markets that are worth your time and resources.
Total addressable market or TAM refers to the total market demand for a product or service. It’s the maximum amount of revenue a business can generate by selling its product or service in a specific market.
Total addressable market is most useful for businesses to objectively estimate a specific market’s potential for growth. This data also helps companies figure out product market fit.
Due to the limitations of your business model (such as specialization or geographic limitations), you’ll have a tough time servicing your total addressable market.
Serviceable addressable market is most useful for businesses to objectively estimate the part of the market they can acquire to figure out their targets.
Unless you’re a monopoly, you most likely can’t capture 100% of your serviceable addressable market. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to only buy your product or service. That’s why it’s crucial to measure your serviceable obtainable market to estimate how many customers would realistically benefit from buying your product or service.
Serviceable Obtainable market is most useful for businesses to determine short-term growth targets. It can also help with competitive awareness and strategizing.
TAM, SAM, and SOM are essential to business strategy and growth planning. This is because these metrics show how much opportunity a particular market holds at every stage of business growth.
TAM SAM SOM is also useful because it’s a simple and succinct way to present the value of an idea. This data gives teams an idea of the target audience and income opportunities for a market or niche.
These metrics can also help businesses share key insights with investors if they are seeking funding. The process makes it easier to make decisions that impact growth.
For example, say you don’t have a clear picture of the right segment for your SAM. This could make your serviceable addressable market too big, which can then impact your SOM.
Now that you know what each of these acronyms is and what they’re used for, let’s get into the nitty-gritty of how to calculate TAM, SOM, and SAM. Doing so requires advanced market research ahead of time, but here are the formulas once you’re able to get those figures:
The best way to calculate total addressable market is by running a bottom-up analysis of an industry. A bottom-up analysis involves counting the total number of customers in a market and multiplying that number by the average annual revenue of each customer in this market.
To calculate your serviceable addressable market, count up all the potential customers that would be a good fit for your business and multiply that number by the average annual revenue of these types of customers in your market.
Divide your revenue from last year by your industry’s serviceable addressable market from last year. This percentage is your market share from last year. Then, multiply your market share from last year by your industry’s serviceable addressable market from this year.
As you get started, keep in mind that these figures will largely be estimates to inform your strategy. The more market research you do and the more historical data you build up, the more precise your planning will be.
Don’t just figure out the opportunities in your market. Use your research to decide who you want to target and how you plan to engage them with your products. Then, use these templates to make your plans clear.
Editor’s note: This post was originally published in March 2019 and has been updated for comprehensiveness.
Stay in touch and up to date with your industry news… Always be a step ahead with BBK Services…
join newsletter now ⤵
