Here’s How to Determine Your TAM, SAM, and SOM with Zero Investment

Have you ever wondered if the new product in your pipeline will succeed? While success largely depends on good execution and strong product features, understanding the market potential and consumer demand is crucial to determining if your efforts will pay off.

Today, we delve into three essential metrics: Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). These metrics are critical for internal strategy and investor pitches, as they highlight the current and future potential of your market.

Without data, you’re just another person with an opinion.

– W. Edwards Deming

TAM: A Macro Prospective

The top-down approach involves examining the market from a macro perspective, which is useful for startups or entrepreneurs exploring new markets. This method helps gauge the market size and potential opportunities for a proposed product.

As most of our clients may know, we like to be practical, so let’s switch to a real example.

Let’s analyze the “Disaster Restoration Services” market, which includes services like flood, mold, and storm restoration. We will focus on the US and Canada to determine if it’s worthwhile to enter this market. Without a Minimum Viable Product (MVP), we start with a macro perspective to assess market potential.

US Client

Step 1: Market Size and Validation

For market size data, start with online research. For example, a report from Fact.MR on the Disaster Restoration Services market provides valuable insights. According to this report, the global market is valued at $41.2 billion, with an expected growth rate of 6% annually over the next five years. North America holds 37% of the global market share, translating to approximately $15.4 billion.

To ensure the data’s reliability, compare it with other sources and check for consistency. The Fact.MR report aligns with other geographical market data, confirming its credibility. This forms the basis of our TAM calculation.

Step 2: Identify Achievable Market Segments

We refine the TAM by examining the split between residential and commercial clients. According to the same report, there are more residential than commercial clients, with increasing awareness towards disaster risks.

To estimate the number of households at risk, we can find the total number of households in the US through a simple internet search. If 3% of households typically face disaster risks, we multiply this percentage by the total number of households to estimate the potential market population.

Step 3: TAM in monetary terms

Next, we calculate the TAM in dollar terms. The average cost of disaster restoration services is approximately $1,500 per service (from competitors). By multiplying this figure by the number of target households, we estimate a TAM of around $9.8 billion.

SAM: Tailored Serviceable Market

Step 1: Probability Measure

To determine the SAM, we create a probability measure. This involves analyzing the potential penetration of services within each segment, considering factors like insurance coverage for disaster risks.

Research indicates that 25% of households have relevant insurance coverage (covered for disaster risk). Since most of the contract are insurance based, we believe this is a good metric for probability.

Step 2: SAM in monetary terms

Multiplying the TAM of each category by this probability gives us the SAM in population terms, which, when multiplied by $1,500, results in a SAM of about $2.5 billion.

SOM: What can you obtain?

The SOM depends on your pricing structure and operational capacity.

Suppose we start operations in California, a state with a higher disaster risk due to frequent natural disasters. Households and commercial properties in California are more likely to have insurance coverage, which is beneficial.

Step 1: Local market estimation

To estimate California’s market share, we can use several methods:

• Compare the number of disasters in California to the total number in the US.
• Look at disaster-related investments in California compared to the entire US.
• If data is unavailable, use California’s GDP weight relative to the total US GDP.

Step 2: Capacity & Price Definition

Once we have an estimate, we assess our operational capacity. Suppose we begin with 10 employees, each capable of covering a 50-mile radius around a central location in California (e.g., Los Angeles). If each employee can service a certain number of properties annually, calculate the total number of properties covered. Multiply this number by the service price ($1,500) to estimate the SOM.

For example:

• Market Share: Assume California represents 10% of the US disaster restoration market.
• Operational Capacity: Assume 10 employees can each cover 100 properties annually, totaling 1,000 properties.
• SOM Calculation: 1,000 properties × $1,500 = $1.5 million.

Conclusions

Identifying your market potential can be challenging but achievable with the right approach. While experience and market analysis expertise are valuable, startups can make initial assessments using this straightforward methodology.

Be mindful of the assumptions that can significantly impact your analysis. Investors will scrutinize your assumptions, so be prepared to justify your findings.

How Ricirca Can Help You

Our tools and expertise combine top-down and bottom-up approaches to deliver precise and reliable market analyses, helping you and your investors make informed decisions.

Explore our affordable pricing for dedicated, customized research to meet your specific needs. Contact us to learn more about how we can help you achieve your market research goals.