Calculating Total Addressable Market
Introduction to Market Sizing
Sizing Up Your Market
Before launching a product or entering a new industry, businesses need to answer a fundamental question: how big is the opportunity? This process of estimating the potential revenue a product or service could generate is called market sizing. It’s like checking the depth of the water before you dive in.
Getting a handle on your market size is crucial for several reasons. It helps you set realistic goals, allocate resources effectively, and craft a winning strategy. For new ventures, a clear understanding of the market potential is essential for attracting investors. A solid market size estimate shows that you've done your homework and that a real opportunity exists.
A key first step in understanding your market and gauging the growth of your business is to calculate your total addressable market (TAM).
To do this, strategists break the market down into three distinct levels: the Total Addressable Market (TAM), the Serviceable Available Market (SAM), and the Serviceable Obtainable Market (SOM). Let's unpack what each of these means.
The Three Levels of Market Size
Think of these three concepts as a set of nested circles, starting with the largest possible market and gradually narrowing down to what you can realistically achieve.
Let’s start from the outside and work our way in.
Total Addressable Market
noun
The entire potential market for a product or service, without any competition or limitations. It represents the total revenue opportunity if a company could capture 100% of the market.
TAM is the big-picture view. It's the total demand for a product or service across all segments and regions. For example, the TAM for a new ride-sharing app would theoretically be the entire global transportation market. It’s a useful number for understanding the maximum possible scale of an idea.
Serviceable Available Market
noun
The portion of the TAM that a company's products or services can realistically serve, considering its business model and geographical reach.
No company can serve the entire world from day one. SAM narrows down the TAM to the segment of the market your business can actually reach. For our ride-sharing app, the SAM might be the transportation market in the specific cities where it plans to operate. It’s the slice of the pie you’re actually aiming for.
Serviceable Obtainable Market
noun
The portion of the SAM that a company can realistically capture in the short term, considering competition, resources, and marketing strategy.
Finally, SOM is your realistic target. It’s the piece of the SAM you can capture given your competition, marketing budget, and sales team's capacity. For the ride-sharing app, the SOM would be the share of the market in its launch cities that it expects to win in its first few years. This is your starting goal—your first beachhead in the larger market.
Before you dive into a new venture, it's helpful to test your understanding of these core concepts.
What is the primary purpose of conducting a market sizing analysis before launching a new product?
Which of the following represents the correct hierarchical relationship from largest to smallest market segment?
Understanding these three levels of the market helps you create a more focused and achievable business plan. It turns a massive, intimidating market into a series of manageable targets.