Some kinds of information are worth their weight in gold bricks.
…Like knowing the size of your market when you’re launching a new product or company, which helps you estimate potential revenue.
Let’s take a look at how to calculate the size of your market.
There are three different metrics you can use.
Let’s pretend we’re selling toothbrushes to make understanding the metrics easier:
Table of Contents
Total addressable market (TAM)
The TAM represents the entire potential value of the market.
There are two ways to determine this:
- Add up figures for toothbrush sales per grocery chain, pharmacy, and retailer.
- Estimate how many toothbrushes per year the average person buys. Multiply it by the number of people in your market, say the US. And then multiply it by the average toothbrush price.
Serviceable addressable market (SAM)
Sticking with our toothbrush analogy, that would be the total amount of electric toothbrushes for kids sold online.
Serviceable obtainable market (SOM)
This is the proportion of your SAM that you can likely obtain with your offer.
To calculate this, divide last year’s revenue by last year’s SAM.
That’s your market share.
Then, multiply your market share by the dollar value of this year’s SAM.
…And that’s your SOM.
As you can tell, determining your TAM, SAM and SOM is simple math. The hard part is getting the data.
There are a few different ways to do this:
- Research existing reports, studies, and whitepapers online to estimate the size of your market.
- Refer to financial reports. Public companies have to share their financial reports with the public.
- Look into market research tools and companies.
- Conduct interviews. Talk to people in your industry to gather information about your market size.
Now put it all together
Compare the data you collected to get a better estimation of your TAM, SAM, and SOM.