Growing a successful business takes more than grit and determination. You need to know your market, and how your product or service fits within it. Service addressable market (SAM), service obtailable market (SOM) and total addressable market (TAM) provide a realistic calculation for your business’ specific market size.
The results enable both founders and investors to gauge the potential of new ventures. Along with your team and problem statement, market size is a primary factor in investment decisions. Without it, you’re shooting in the dark.
Ultimately, your service addressable market should inform your strategy and how you will engage your target market. Here, you’ll find out how SAM is calculated, how to visualize it, and how you can build upon it as your business grows.
What is a service addressable market (SAM)?
The service addressable market (SAM) refers to the size of your potential customers. It’s your target audience in full, indicating its size and revenue potential.
If TAM is the total industry, your SAM represents the portion of the market you seek to serve. Understanding your SAM helps you gain insight to both the size of your customer base, and how you might approach expanding it.
Still, SAM is one component of the total equation.
Understanding TAM & SOM
It’s easier to understand SAM by explaining what TAM and SOM are:
TAM – or total addressable market – is the total demand for your product or service. It’s the worldwide market for your industry and the broadest metric that acts as a base figure you can operate on. TAM alone assumes you are a monopoly without competition in your industry.
SOM – or service obtainable market – is the most immediate market you can add value to. It’s the portion of the market you can most realistically profit from given your current position.
Whilst TAM refers to the total sector size, SAM gives a clear idea of the niche within the industry you can realistically tackle. Your SOM market is then the final stage, which lands you at the immediately available segment of that target audience.
These established sales terms can help estimate realistic revenue expectations on a typically short- or mid-term basis.
Why is SAM important?
SAM helps you understand and communicate your potential trajectory as a business. It determines your available market and informs base decisions.
Suppose you wish to launch an esignature app. Your TAM figure would be the global market of people that need to sign contracts and documents (e.g., law firms, agencies, freelancers, etc.)..
Factors such as the features you offer, the languages your app is available in, and acquisition channels will reduce that number to your SAM. Within that context, a successfully calculated SAM will enable a business to fine-tune their strategy, and more effectively approach their niche.
A way of visualizing SAM
Here’s a simple analogy:
TAM is how big the pond you are fishing in is, SAM is how many fish there are in the pond, and SOM is how many fish you are likely to catch.
The simplest way to visually depict your SAM is within a stacked venn diagram of TAM, SAM and SOM.
You can obtain your statistics from established databases such as World Bank, Statista, CIA World and Factbook, before applying filters to determine your SAM. This is the “top down” approach, which cautions you against the temptation to pick an arbitrary percentage.
The more accurate “bottom up” approach to calculating SAM involves comparing ground-level customer validation and primary research with external data.
How to expand SAM
There are a few ways to expand SAM. Here’s a few you can apply:
Look at what’s working already
Get into your marketing and sales data to see which channels are working and identify ways to more effectively reach your target personas. Here are some ways you can do this:
- Track key growth metrics such as recurring revenue, churn levels, up-sells and cross-sells.
- Identify your ideal customer and devise ways to reach them.
- Find ways to expand your reach in scalable acquisition channels, such as social media, search engine optimization, and referral marketing.
Offer more products and services
Launching new products and services can help you increase your scope and reach more people that may not have been interested in what you have to offer. Depending on the type of business you’re in, this can be easier said than done, but it can significantly expand your SAM if you can execute on this. In particular, you can:
- Launch new offerings targeting different segments of the same market. For instance, VEED, an online video editor, used to have a product roadmap that centered around what video editing tasks people search for online.
- Tweak your positioning and messaging to reach a wider market. At the same time, make sure you’re not alienating your current customers.
- Analyze your competitors and see how they’re expanding their market reach through their different offerings.
Prioritize quick wins
It’s tempting to ogle the bigger picture but this can lead you to missing the immediate value at your fingertips. By first exploiting unrealized potential in smaller segments, you have a more actionable opportunity to begin expanding SAM. For instance, you can:
- Automatically send messages urging happy customers to recommend your product to their network.
- Figure out ways to increase customer retention and reduce churn.
- Increasing the amount of revenue each customer brings in on average.
Use reliable data over soft metrics
As we’ve mentioned before, tracking the right growth metrics can help you figure out how to expand your SAM. On the other hand, tracking “soft metrics” can end up being a costly mistake and keep you from reaching your customer segments.
Leaning on “soft metrics” for expansion plans is not as sturdy as reliable data. Statistics like impression levels and registered users should take a backseat to more concrete metrics like revenue growth, cost of acquisition, churn and recurring revenue.
By taking evidently successful measures and applying them to savvy market opportunities, you can increase the chances of expanding your SAM.
Build with Growth Mentor today
As your business ages, your data will become more useful. Over time, you should be able to act upon the information you gather from your SAM with better precision.
Applying critical metrics to your business from the outset can be daunting and confusing, but Growth Mentor’s network of nearly 500 experts can provide their experienced perspective on doing it right.