With all the excitement that comes with starting a new company and gauging its industry’s profit potential or forecasting a revenue goal for your business, 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. Read on to start setting realistic revenue goals and entering markets that are worth your time and resources.
TAM SAM SOM Template
TAM (Total Addressable Market)
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 possibly generate by selling their 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.
According to MIT’s Global Startup Labs program, 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 (which you can do by adding up the amount of customers each company in this market has) and multiplying that number by the average annual revenue of each customer in this market.
SAM (Serviceable Addressable Market)
Unless you're a monopoly, you most likely can’t capture the total addressable market for your product or service. 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 available market to determine how many companies would realistically benefit from buying your product or service.
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 customer in your market.
SOM (Share of Market)
Share of market is the size of your actual customer base or the realistic percentage of your serviceable addressable market that you can capture. This figure can help you predict the amount of revenue you can actually generate within your market.
To calculate share of 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.
Originally published Mar 22, 2019 7:00:00 AM, updated July 12 2019