TAM SAM SOM : It answers the question "What portion of the market can your business reach?"

Starting a business is challenging, especially when you're constantly bombarded with terms like EBITDA, PAT, TAM, Bootstrap, and many others. Navigating these concepts can be overwhelming, particularly in the early stages of your startup. To help ease the confusion, here’s a concise explanation of three important terms: TAM, SAM, and SOM. Understanding these will ensure you’re well-prepared when they come up in conversation.?

Market analysis reports often include the use of the acronyms TAM, SAM, and SOM. These acronyms represent Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Share of Market (SOM) respectively.

Meaning of TAM SAM and SOM?

Let’s understand the meaning of the same while taking example of a Software Development Company who is selling Software to the across for Accounting purposes.

TAM

TAM meticulously analyzes market demand to provide insights essential for revenue estimation and strategic decision-making when introducing or expanding products or services.?

It answers the question: "What is the size of the largest possible market?"?

Suppose the global market for accounting software sales is anticipated to reach INR 2 lakh crore, encompassing all potential customers seeking accounting solutions in the current period.

?Therefore, our Total Addressable Market (TAM) stands at INR 2 lakh crore.?

SAM

The Serviceable Addressable Market (SAM) refers to the portion of the Total Addressable Market (TAM) that a company can realistically target and serve. This takes into account the company's specific business model, distribution channels, and operational capabilities. SAM represents the subset of the broader market that the company can effectively reach with its products or services, given current logistical, geographical, and market constraints. It is a more focused measure of market potential, highlighting the actual market opportunities available to the business within its current operational scope.?

It answers the question: “How does your business fit into the market?"?

Let's consider that our company is targeting all small business customers across India. There are approximately 6 crore small and medium business owners in the country. We estimate that 80% of these businesses could benefit from our software, with an average spending of INR 10,000 per business.?

To calculate our Serviceable Available Market (SAM), we use the following formula:??

= Number?of?Business?Owners x Percentage?that?can?benefit x Average?Spending?per?Business

In our case SAM will be?

= 6 Crore ?businesses x 80% x INR?10,000? = INR 48,000?crore?

Therefore, our SAM is INR 48,000 crore.

SOM

The Serviceable Obtainable Market (SOM) represents the portion of the Serviceable Available Market (SAM) that a company can realistically capture within a specific timeframe. It reflects the actual market share that a business expects to achieve given its current capabilities, resources, market conditions, and competition.?

It answers the question: 'What portion of the market can you reach?"?

Given that we are new to the market and will face competition, let's assume we can convert only 4% of the business owners we target. This conversion rate means our Serviceable Obtainable Market (SOM) is calculated as 4% of our SAM, which is INR 48,000 crore it will be,

= INR 48,000 crore x 4%?

= INR 1,920 crore?

Therefore, our Serviceable Obtainable Market (SOM) is INR 1,920 crore.

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