Launching a product or service is an exciting yet challenging ambition that demands thorough planning and investigation from entrepreneurs. From idea to execution, each stage requires careful consideration and informed decision-making to navigate the hurdles of product launch. One critical aspect of this journey is market validation, a process that involves evaluating a market’s size and revenue potential, often determined by assessing the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). Through this evaluation, entrepreneurs gain valuable market insights that help shape decisions concerning operations strategy, resource distribution, market positioning, and business viability.
In this article, we explore the significance of TAM, SAM, and SOM, examining the combined insights they provide and how such insights help build resilient and thriving businesses in today’s ever-changing marketplace.
What Is Total Addressable Market (TAM)?
Total Addressable Market (TAM) refers to the total demand for a product or service within a given market. Essentially, TAM represents the maximum potential revenue a business can earn, assuming no competition or constraints exist. To help explain this concept, let’s consider the example below.
Imagine you’ve launched a beverage company called Peter’s Pop Co. (Peter’s) and are preparing to sell a carbonated soft drink named Razzle Dazzle. In this scenario, Peter’s TAM includes all consumers of carbonated soft drinks worldwide, spanning various demographics, income levels, consumption patterns, cultural backgrounds, and geographical regions. According to 2024 market research by Statista, the global carbonated soft drinks market generates C$299.4 billion in annual revenue. This figure serves as Peter’s TAM, representing the total revenue opportunity available within the carbonated soft drink market.
What Is Serviceable Addressable Market (SAM)?
Serviceable Addressable Market (SAM) represents a subset of TAM that a business can realistically target with its products or services. In other words, SAM reflects the maximum revenue a business can attain when considering constraints such as geographic limitations, regulatory requirements, and operational capacities. Let’s revisit the example of Peter’s to delve deeper into this concept.
Suppose Peter’s operations, from batch mixing to bottling, are centralized in Calgary, Alberta. Peter’s current strategy is to leverage existing industry relationships and operational efficiencies to establish a strong presence in the Canadian market before expanding internationally. Through partnerships with national trucking companies and retailers, Peter’s is capable of distributing its product Razzle Dazzle in select stores across Canada. Given these conditions, Peter’s SAM includes all carbonated soft drink consumers in Canada, which Statista’s market research indicates is C$3.9 billion in annual revenue.
What Is Serviceable Obtainable Market (SOM)?
Serviceable Obtainable Market (SOM) represents a segment of SAM that a company can reasonably capture within a defined timeframe. To put it another way, SOM indicates the market share a product or service can feasibly obtain over the short to medium term, typically spanning one to five years. Similar to SAM, SOM takes into consideration several factors, including production capabilities, supply chain logistics, marketing and sales strategies, and competitive dynamics.
Returning to our example, suppose Peter’s faces stiff competition from established carbonated soft drink giants like The Coca-Cola Company and PepsiCo. As a new entrant, Peter’s also faces constraints, including a limited marketing budget and distribution network. However, based on positive results from early market research, Peter’s anticipates capturing a 2% market share within the first year of operation. Given the SAM outlined earlier, Peter’s SOM amounts to C$78 million in revenue within the first year of operation.
Why TAM, SAM, and SOM Metrics Are Essential for Your Business?
By evaluating TAM, SAM, and SOM, entrepreneurs not only gauge the market’s size, attractiveness, and revenue potential but also gain insights into the competitive landscape and varying customer segments. This understanding helps mitigate the risks of entering a new market and empowers entrepreneurs to make well-informed decisions regarding resource allocation, investment strategies, market positioning, and the feasibility of launching a business. Let’s explore three scenarios to see how TAM, SAM, and SOM help inform entrepreneurs.
TAM is limited: If TAM appears to be limited in size, this may suggest that the underlying problem isn’t substantial enough to sustain a business. Alternatively, it could reveal that TAM has been too narrowly defined and can be better segmented when analyzing SAM.
TAM is sizeable, but SAM is limited: A large TAM with a limited SAM might indicate that the market faces various constraints and barriers to entry. Alternatively, it could indicate that the chosen market segment is too niche and needs broadening to be viable.
SAM is sizeable, but SOM is limited: A large SAM with a limited SOM could reflect a challenging competitive landscape, strong customer loyalty, or significant barriers preventing customers from easily switching. Further analysis is likely needed to identify the underlying causes.
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Analyzing TAM, SAM, and SOM is critical for achieving sustained success in today’s fiercely competitive economy. This is especially true for entrepreneurs and startups introducing new products or services. By evaluating the market your business intends to enter and conducting thorough research early in your path to product launch, you arm yourself with invaluable market insights. Integrating these insights into decision-making processes enhances your likelihood of establishing a resilient, successful business capable of flourishing in today’s dynamic marketplace.
Do you have a software idea or concept but haven’t completed all the necessary stages of product launch, including a TAM, SAM, and SOM analysis? If so, you might be an ideal candidate for Vertical Motion’s Product Launch program. Our program is designed to assist business owners and entrepreneurs in validating their software concepts before embarking on funding and development. Contact us today to learn more and see if Vertical Motion’s Product Launch program is right for you!
Vertical Motion is a trusted Canadian software development and entrepreneur assistance company that has supported the global efforts of startups, non-profits, B2B, and B2C businesses since 2006. With headquarters in Calgary and Kelowna, and team members coast to coast, Vertical Motion is recognized as an award-winning leader in the technology industry. Our team of executive advisors, project managers, software developers, business analysts, marketing specialists, and graphic designers have extensive experience in several industries including — Energy, Finance, Blockchain, Real Estate, Health Care, Clean Technology, Clothing & Apparel, Sports & Recreation, Software as a Service (SaaS), and Augmented & Virtual Reality (AR/VR).
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Marketing | Communications | Sales Specialist at Vertical Motion