They say good communication starts with a common understanding of words - it makes sense, right? So let’s start with the basics: TAM, SAM and SOM are all measures of market size and can be defined as follows.
Ok, great! Or is it? We personally think these definitions aren’t sufficient or self-explanatory, so we’ll try to clarify them with some examples. Let’s imagine we have a platform that allows users to compare and book cheaper flights. In a very straightforward way, we can consider TAM as the total sales in the world related with flight bookings, as once it is an online platform it has the potential to reach customers around the world.
However, looking then at the customer segments of flight booking services - maintaining the example we mention above of a platform which value proposition is more focused on price -, there are some potential clients who, realistically speaking, will likely value other ways of booking flights, based on other information they value more than price, on other preferred channels… Maybe they prefer the human interaction when buying these services, maybe they value a premium experience over a lower price, who knows! So, by excluding those segments, we’re starting to filter our total available market, and by the end of this segmentation, we’ll have our SAM.
Lastly, even filtering out the segments that don’t match our value proposition, we can achieve an even more realistic market size if we consider the resources we currently have or project to have in the near future. If you think about it, this fictional flight booking platform would still depend on one thing: partners. To present prices and allow booking, it needs to have agreements with flight provider X, flight provider Y, etc. These flight providers that showcase their services in the platform will operate in certain regions, but not in others. Do you get where we’re getting at? Yes, our obtainable market is determined by the limitations of what we can realistically offer taking into account the resources we have or plan to have. So if this platform only has flight providers operating in Europe, the serviceable obtainable market - our SOM - will be the part of the SAM that corresponds to flights in this region.
Now that we’ve got those clarified, let’s go into the quantification of each market.
We’ve more or less gave you a hint on how to quantify the market size of your company when we went through the examples of TAM, SAM and SOM. To be more precise, we started with the overall market size of a fictional flight bookings platform, then we went through its segments and identified which would make more sense to focus on taking into account the company’s value proposition, and finally targeted a specific region based on the resources (on that example, partners) available for such company. What we just describe here is a classic Top-Down approach to market size.
A Top-Down approach is more likely to work in more mature markets, especially those that have reported results that you can consult in some clicks exploring the web. If you’re lucky, you’ll even stumble upon a direct competitor who’s already quantified the TAM, SAM and SOM for you. There’s a lot of sources you can look for to have information on market sizes, including public ones such as Eurostat, US Census Bureau, UN, IMF, World Bank, OECD, annual reports, industry associations publications or consulting companies like PwC or McKinsey.
However, if you’re creating something extremely innovative - or one of those products or services that require working on the creation of the need itself - you’ll probably have to follow a bottom-up approach, or what in business jargon is called “counting noses”. The bad news is: this approach requires a lot more work. The good news is: as it usually depends on a direct interaction with potential customers to validate assumptions, you can end up with not only an extremely accurate market dimension, but also a much more clear value proposition and positioning. In other words: instead of focusing on the market size, once that market is not yet defined, you will be focusing on the problem.
This bottom-up approach is based on a very simple equation: number of potential customers times the price you will charge for each unit of your service times the frequency a potential client is expected to buy that product or service from your company. So you will likely start with an idea of who your potential customer could be, and then you’ll reach out to a few of them to see if you’re actually onto something there or not. If yes, great - you can move on to test pricing models with them. If not, just continue researching and testing potential applications for your innovative product or service. When you’re done validating all the profiles of potential customers that could actually be interested in what your company has to offer, as well as a more realistic idea of a price and frequency of purchase, you multiply the three and that’s how you get to your market size.
As we’ve mentioned in the very beginning of this article, knowing your market size will prevent you from a very embarrassing presentation of a business model that projects sales with either astronomical or not sufficiently ambitious market shares to potential investors. More than that, you will need this information as reliable as possible to serve as the basis of decision-making at a more strategic level. As they also say: plans are nothing, but planning is everything!
To help you on that, we’ve included a market share year-over-year graphic on the dashboard of our financial modeling tool based on the sales that are projected according to your inputs and on the Total Available Market you define when creating your company’s profile. Sounds interesting? Take a look at our business pricing plans starting at €14,90 a month.