Thursday, 15 November 2012

Marketing: Explain TAM, SAM, and SOM?

When considering a market in marketing strategy, the TAM, SAM and SOM acronyms are often used.

TAM - Total Addressable Market

The total addressable market (often called total available market too) is an estimation of the total revenues which could realistically be served for a given product or service, regardless of competition or customer reachability. It is the maximum amount of revenues one can expect from a market if one had a monopolistic control over it.

For example, the ice-cream market in the U.S.: 10 billions per year.

This number can be computed from real numbers when these are publicly available. If you know the total number of units produced per year for a given item, and if you know its average price, you can compute a good estimation of the TAM.

If such information is not available, one can use a bottom-up estimation, by estimating the size of the population eating ice-cream, using demographic data, and compute the average price per item by combining the different brands' prices.

SAM - Serviceable Available Market

The serviceable available market is the part of the total addressable market a company can reasonably expect to reach considering its business model.

For example, an ice-cream company selling only in New-York City: 2,64% of TAM = 264 million per year, based on New York City versus U.S. population.

We can also think about the different flavors an ice-cream company can offer. Since such a company usually cannot offer all the flavors all the other ice-cream companies offer, this explains why the SAM is (almost always) smaller than the TAM.

SOM - Serviceable Obtainable Market

The serviceable obtainable market, also called share of market, is the part of the SAM revenues a competitor expects to grab from the market, considering the practical limitation of the implementation of their business model. It often is a projection of expectations.

For example, a New York City ice-cream company selling only in New York City cannot expect to sell all the ice-cream sold in New York City. Assuming they can sell from supermarkets and to restaurants, and that these channels represent 55% of all sales, and assuming they expect their brand to represent 40% of these sales, their SOM is 264 million * 55% * 40% = 58 millions.