Question

How to calculate TAM, SAM, SOM? and what is the benefit of knowing TAM, SAM, SOM for prospective entrepreneurs and potential investors?

Answer 1

TAM is (Total Addressable Market)

It refers to the total demand for a particular product or service in the market. It’s the maximum amount of revenue that can be generated by selling the product or service in a specific market. TAM is calculated by running a bottom-up analysis of an industry. TAM is calculated by counting the total number of customers in a market and multiplying it by the average annual revenue of each customer.

SAM (Serviceable Addressable Market)

SAM determines how many companies would benefit from buying the company's product or service. To calculate SAM, the potential customers that would be a good fit for the business will be multiplied by the average annual revenue of these customers in a particular market.

SOM (Share of Market)

SOM is the size of actual customer base or the realistic percentage of serviceable and addressable market that the company can capture. To calculate SOM, revenue from last year is divided by serviceable addressable market from last year. This is called market share of lat year. This will be then multiplied by industry’s serviceable addressable market from this year.

Benefits of knowing TAM, SAM, SOM

• Knowing these will help the company to find out who actually buy their products and services
• Helps to identify the total demand for the product
• To take decisions based on current business model
• To analyse the practical limitations of the business model
• Investors can make investment decisions based on TAM, SAM, SOM. Because these will give an idea regarding the demand for the products or services of a particular company in the market