TAM, SAM, and SOM
TAM estimates the entire available market. While this is an interesting data point, it's not actionable on its own. Further analysis is needed to estimate two related values: serviceable available market or SAM and serviceable obtainable market or SOM.
Serviceable available market (SAM)
Returning to the product for green-eyed consumers, let's assume the business will only pursue customers in the U.S. The estimated U.S. population of 336 million equates to about 6.72 million prospective green-eyed customers. At $5 each, the SAM revenue opportunity is $33.6 million.
Serviceable obtainable market (SOM)
The number the business needs for financial projections is one step deeper. It is the portion of SAM the business can reasonably capture, also known as the serviceable obtainable market or SOM. If the decision-makers believe the product can capture 25% of the U.S. population of green-eyed consumers, the SOM is $8.4 million or 25% of $33.6 million.
Calculating total addressable market
There are different ways to calculate total addressable market. Common methods include:
- Top down: The top-down method begins with broad population data and narrows it down to the relevant segment.
- Bottom up: The bottom-up approach starts with niche data that can be applied to the wider population. Statistically valid surveys are often used for this purpose. A survey can be answered by, say, 1,200 people, but the conclusions are then applied to a larger group, such as all U.S. households.
- Value theory: Value theory focuses on how much consumers are willing to pay for the product or service. This method is useful for new products for which there are no established buying patterns. The analysis might begin with sales of similar products, adding a premium for the additional value associated with the new product.
