Calculating TAM SAM SOM: Understanding Market Size For Your Product
By Storeplum Editorial
Posted | 5 min read
Have you ever wondered how much potential market is available for your product and whether it will be profitable from day 1? This article is written for readers who are directly selling their products to consumers, often termed as B2C.
Market size refers to the number of customers who might buy your product. Before launching, it’s a good idea to get an estimate of how many people could buy your product, and whether or not there’s enough demand to support your planned sales volume.
In this guide, we'll discuss how to find market size for a product that you want to sell online.
Why is finding the right market size important?
When you're trying to sell a product online, it's important to know what the demand for that product is. If there's not enough demand, then it can be hard to make money and you could even lose money if your inventory costs too much.
On the other hand, if there's too much demand (more than you can handle) then your sales will suffer because you won't be able to fulfill all of your orders.
The good news is that it's possible to figure out exactly how many people might want to buy your product. In fact, Google Trends make it a bit easy for you. Here is a trick to get a rough idea to find out the right market size for your product:
Go to Google Trends and search for a description of your product. For example, "handmade soap" or "pain reliving shoes"
You'll see a chart showing how many people have searched for that term over time. You can change the settings at the top of the page (under "show search volume") to show searches from specific countries or regions of the world, which can be helpful if you're only interested in selling in one place.
Is it too big or too small?
Calculating the market size of a particular niche is essential to deciding whether you have a viable business idea on your hands. If your niche is too small, there won't be enough customers to make your business successful.
A good rule of thumb is that you need at least 1,000 potential customers in your target market who will spend money with you or subscribe to your service. If your potential customer base is smaller than this, you'll probably have a hard time growing.
So how do you know if the niche you're thinking about jumping into is too big? The way you can tell is by looking at the number of competitors in the market. If there are more than 10,000 competing companies in the space, then it's time to consider something else.
Those numbers aren't etched in stone and you may be able to easily stand out without doing anything special in terms of branding or marketing if there are less
Understanding Total Addressable Market (TAM)
The total addressable market, or TAM, is the total revenue opportunity for your product. It is a key metric used by businesses to determine if the market size is large enough to justify the resources (time, money, people) required to capture that opportunity. The TAM is typically expressed as a dollar amount or an estimate of the number of customers.
For example, let’s say you have a new category of shoes and slip-ons named “Healing Shoes” that helps people with wide feet and arthritis to walk and jog without any pain. You believe that these shoes would be valuable to people over 40 with knee pains and arthritis. If you calculated that there are 10,000,000 such people in US and that they spend an average of $40 annually on such solutions, then your TAM would be $400 million ($10m x 40)
While it may seem straightforward to calculate TAM, it’s often more complicated than it seems on the surface.
You need to make a lot of assumptions about how large the market is now and how it will grow in the future. You also need to make assumptions about how much of that market you can potentially capture with your product (see below).
Understanding Serviceable Addressable Market (SAM)
A serviceable addressable market (SAM) is the total amount of a product or service that can be sold to targeted customers. This is different from the total addressable market, which may also include potential customers who wouldn't purchase your product or service. It's important to understand what your SAM is because your product won't sell if potential customers aren't aware of it, don't want it or can't afford it.
Your serviceable addressable market (SAM) is the market size that your company can actually serve. In other words, it’s the maximum potential revenue your company can generate.
SAM is a function of multiple factors, including:
The number of potential customers
This is a function of population and income levels. If we continue with our example of “Healing Shoes” your SAM will be very different if you're in New York than if you're in a lower-income country like Zambia.
Your SAM is limited by the channels that you can use to reach customers and by your ability to meet their demands. For example, if you depend on distributors and they won't serve a particular region or type of customer, then those people are out of your SAM equation.
Understanding Serviceable Obtainable Market
In an ideal world, you’d like to have 100% market share for your product. But that is rarely the case. SOM or serviceable obtainable market determines how many customers you can realistically obtain with your current GTM strategies. SOM is most useful to determine short term business targets.
Simply put, it is calculated as a multiplication of last year’s market share with this year’s SAM.
As a matter of fact, all of these numbers- TAM, SAM, SOM will be an estimates which help you in building your strategy.
Your success in building the strategy largely depends on what factors you consider in calculating market sizes. Chances of coming up with accurate estimates is directly related to the amount of research you do in understanding your target market.
Storeplum's in-house editorial team brings to you the best content when it comes to growing your online business on the Internet. We write about growth hacks, case studies, government schemes and other related information for e-commerce business.
- Make Most Out Of Word Of Mouth Marketing With These 5 Strategies
- A Guide to Using Instagram Features To Market Your Online Store
- How to set up an online store for less than ₹2000 a month
- 5 Business Ideas For Women in 2022
- 4 Ways To Show Your Brand Personality On Your Website
- Triple Your Profits With These 7 Pricing Strategies for Your Online Store
- Is Your Online Store Demanding Too Much of Your Time? Look No More.
- 6 Reasons For Your High Shopping Cart Abandonment Rate
- Avoid These Hidden Costs Before Starting Your E-Commerce Store
- First Time Entrepreneurs: Stop Doing These 5 Mistakes At Any Cost
- How to Build a Community Around Your Brand and Online Store
- 5 Easy To Follow Ways for Women Entrepreneurs To Grow Their Business
- SEO For Beginners: 4 Easy Steps To Grow Your Website Traffic Without Spending Any Money
- How To Start Selling Online: The Ultimate Guide To Becoming An E-commerce Entrepreneur In 2022
- 6 Things You Should Know Before Starting an Online Store
- Boost Your E-commerce Store Growth With This Quick Guide On Email Marketing.
- 5 Powerful Ways To Add FOMO Or Fear Of Missing Out In Your E-commerce Business
- How To Start An Online Home Decor Business
- 4 Prominent Marketing Channels For Your E-commerce Business Growth
- 4 Best Practices For That Killer Product Category Page
- How To Start With Ecommerce Branding: A Step By Step Guide For Beginners
- How To Start An Online Sustainable Fashion Brand
- The Ultimate Guide For Building Your E-commerce Funnel (With Examples)
- 5 Not So Known Ways To Drive More Sales To Your E-commerce Business
- 5 Easy Tips To Make People Love Your Brand In No Time
- Increasing Instagram Followers For Your Online Business: The Definitive Guide
- 7 Proven Ways To Reduce Bounce Rate On Your E-commerce Website
Try Storeplum for FREE Today.
No credit card required