TAM, SAM, and SOM: A Comprehensive Guide for Product Managers by a Marketing Professional

As a product manager, understanding market sizing is fundamental to steering your product towards success. Three critical components of market sizing are the Total Addressable Market (TAM), the Serviceable Addressable Market (SAM), and the Serviceable Obtainable Market (SOM). Today we shall delve deep into these concepts, breaking them down with clear explanations, some real-world examples, and practical insights.

Defining TAM, SAM, and SOM

What Are They?

Before zooming into SAM and SOM, it's essential to understand the broader context provided by the Total Addressable Market (TAM).

1. Total Addressable Market (TAM): The total market demand for a product or service. It represents the maximum revenue opportunity available if you capture 100% market share. For Example: For a new smartphone, TAM includes all potential smartphone buyers globally.
2. Serviceable Addressable Market (SAM): The portion of TAM that you can realistically target given your product offerings and geographical reach. SAM narrows down the market to those customers you can serve with your current resources. For Example: If your smartphone only operates on specific networks and is sold in certain countries, your SAM includes only those users.
3. Serviceable Obtainable Market (SOM): The percentage of SAM that you can capture. It's your realistic market share within the serviceable market over a specific time frame. SOM helps set attainable sales goals and revenue projections. For Example: If you expect to capture 5% of your SAM in the first year, that's your SOM.

Why do SAM and SOM Matter?

1. Strategic Focus: They help prioritize markets and customer segments that offer the most significant growth opportunities.
2. Resource Allocation: Inform decisions on where to invest time, money, and effort for maximum ROI.
3. Investor Appeal: Demonstrating a clear understanding of your market sizes can make your business more attractive to investors.
4. Competitive Edge: Understanding SOM aids in benchmarking against competitors and identifying areas for improvement.

How to Calculate SAM and SOM?

1. Start with TAM:

- Identify Total Demand: Determine the total potential market for your product.

Example: A language learning app might consider all smartphone users interested in learning new languages globally.

2. Define Your SAM: Narrow Down the Market:

- Geographical Limitations: Where is your product available?

- Product-Specific Constraints: Does your product cater to specific needs?

Example: If the app supports only certain languages, SAM includes users interested in those languages in regions where the app is available.

3. Determine Your SOM: Estimate Market Share:

- Competitive Landscape: Who are your competitors?

- Marketing and Sales Capabilities: What's your reach?

- Operational Capacity: Can you handle the projected demand?

Example: If you can realistically capture 10% of your SAM based on marketing budget and user acquisition rates, that's your SOM.

Let's understand it better with a few examples:

1. Tesla's Electric Vehicles

- TAM: The global automotive market.

- SAM: Consumers in markets where Tesla operates, interested in electric vehicles (EVs).

- SOM: Tesla's projected market share of EV sales within those markets.

Insights:

- Market Growth: As more countries adopt EV-friendly policies, Tesla's SAM expands.

- Innovation Impact: Advances in technology can increase SOM by attracting new customers.

2. Airbnb's Home-Sharing Platform

- TAM: The worldwide accommodation industry, including hotels and rentals.

- SAM: Travelers open to home-sharing in regions where Airbnb is authorized to operate.

- SOM: The percentage of those travelers who choose Airbnb over other options.

Insights:

- Regulatory Factors: Local laws affect SAM by limiting operational regions.

- Trust and Safety: Enhancing user trust can increase SOM by converting more users.

3. The Orchard Metaphor: Imagine you're in an orchard.

- TAM (Entire Orchard): You see all the fruit-bearing trees.

- SAM (Accessible Trees): You walk to the trees you can reach with your ladder and tools.

- SOM (Harvested Fruit): You pick up the fruit you are able to harvest/sell today.

When and Where to Apply SAM and SOM

1. Business Planning: Essential for creating realistic business plans and financial projections.
2. Marketing Strategy: Helps in tailoring marketing efforts to the most lucrative segments.
3. Product Development: Informs feature prioritization based on target market needs.
4. Market Expansion Decisions: Guides choices about entering new markets or launching new products.

Let's Dive Deeper

1. Market Dynamics

• Emerging Trends: New technologies or consumer behaviors can expand your SAM.
• Competitive Actions: Competitor moves can impact your SOM, either positively or negatively.
• Regulatory Changes: Laws and regulations can redefine your SAM by opening or closing markets.

2. Data Sources

• Industry Reports: Organizations like Gartner, IDC, and Forrester offer valuable market data.
• Government Data: Census and economic data provide demographic insights.
• Customer Insights: Surveys, interviews, and focus groups help refine your understanding of SAM and SOM.

Practical Steps Forward

1. Conduct Thorough Market Research: Gather data from reliable sources to define TAM, SAM, and SOM accurately.
2. Perform Competitive Analysis: Understand your competitors' market share and strategies to inform your SOM estimates.
3. Develop a Go-To-Market Strategy: Tailor your marketing and sales efforts to target your SOM effectively.
4. Set Realistic Goals: Use your SOM to set achievable sales targets and KPIs.
5. Monitor and Adapt: Regularly review your SAM and SOM as market conditions change.

Conclusion

Grasping the concepts of SAM and SOM empowers you as a product manager to make informed strategic decisions. By accurately sizing your market, you can:

• Focus Your Efforts: Concentrate on the most promising market segments.
• Optimize Resources: Allocate budgets and teams where they'll have the most impact.
• Drive Growth: Set the stage for sustainable expansion by understanding where opportunities lie.

Remember, market sizing isn't a one-time task but an ongoing process that evolves with your product and the market landscape.

Mastering SAM and SOM equips you with the insights needed to navigate the complex market landscape effectively. By continually refining your understanding and staying attuned to market shifts, you position your product and your team for ongoing success.

--- Alok Upadhayay