What is TAM, SAM, and SOM??
TAM, SAM, and SOM are subsets of the business market and are meant to assist you in understanding your business’ relationship to the market better. You might be asking yourself what market can I reach, and TAM, SAM, and SOM will help you answer this question.
TAM stands for Total Addressable Market/Total Available Market and is defined as the overall revenue opportunity that is available to a product or service if 100% market share was achieved. In other words, it describes the total revenues that a company could theoretically make, if it had an all-encompassing monopoly with its product or service. Out of all three of these components, TAM is the most abstract because it does rely on how you envision your business and what your products and services are. It’s important to understand that TAM is not a number of customers, but rather dollars per year.
Let’s take AirBNB for example. It started out as a way to make extra cash for the founders, but quickly grew into a trade that rivaled the hotel market. It marketed itself as different from hotels by providing spaces that were more like homes than stuffy hotel rooms. Along with being overall cheaper than hotel rooms, AirBNB allowed customers to lodge in more unusual places, places where hotels were not available, like deserts or mountainous areas. These locations appealed to many people; therefore, picking AirBNB’s over the typical hotel location, which were farther away and required transportation. As the company grew, they accommodated this slice of the market and became the largest provider of lodging.
SAM stands for Serviceable Available Market/Serviceable Addressable Market. The SAM answers the question, “for which part of the TAM is our product appropriate?” The SAM describes the market that you can address with the current business model. The SAM is important for startup founders because it represents the target group for the product. The more precisely you define the SAM, the more efficient and effective your sales and marketing efforts will be. You should think about competition, geography, culture, regulations, financial limitations, willingness to pay, market cannibalization, and resources when it comes to your SAM.
Again, with AirBNB, because they supply the lodging for people that want to travel to places that do not have hotel lodging, they know that they have to market to the people who love to travel and travel to unusual places. Since the average pricing of hotels per night is higher than AirBNB per night, they market towards the people who want to spend less or do not have as much to spend on hotels. (Note: the pricing of hotels and AirBNB per night is not always true because it depends on where you stay, how long you stay, and how big your lodging is, but on average, it is true.) All of these people would be appropriate for AirBNB.
SOM stands for Serviceable Obtainable Market/Share of Market and it pertains to what your goal is or how much of the market in your location you can reach. Because your business is most likely not the only one of it’s kind in your area, you have to think about competition and how your business will do while competing with the other businesses. To evaluate this, you’ll need to have both a strong understanding of your local market and a deep knowledge of your own company and what you can deliver. The SOM is a subset of SAM that is restricted by natural barriers, such as distance and language, limited capacity (production capacity or marketing capacity), and loss of market share to competitors.
AirBNB have many more competitors than just the hotel chains that exist, like HomeAway, Vrbo, FlipKey, and 9flats, so they have to think about these competitors when it comes to pricing, advertising, online usability, and their marketing overall for their lodging locations that are near their competitors locations.
TAM, SAM, and, SOM can seem intimidating at first, but using these strategies for your business marketing will only help your outcome in your market. We hope this guide simplifies the process of building a bigger and better business!