Definition
PAM, TAM, SAM and SOM are acronyms that represents different subsets of a market.
- PAM or Potential Addressable Market includes people not currently included in your target market, but potentially could be in future.
- TAM or Total Available Market is the total market demand for a product or service.
- SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
- SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.
Let’s take an example to understand better
Let’s say you are starting a Co-working Space. Your TAM would be the worldwide all small-big enterprises, freelancers, Startup teams etc. Potentially, if you were present in every country and had no competition you would generate TAM as revenues.
Let’s be more realistic. You are starting your Co-working Space in two cities where the demand for Co-working Space can be estimated based on: the population, their work culture, and the revenues generated by Co-working Space in other cities having similar demographics.
That is your Serviceable Available Market: the demand for your type of products/services within your reach. In other words if you were the only Co-working Space in city you would generate revenues of SAM.
Now, Suppose you are probably not the only Co-working Space in your city.
So realistically you can hope to capture only a fraction of your SAM. Most likely you will attract people living or working close to your Co-working Space and a fraction of the people located further away that are willing to give your Co-working Space a try due to extra features being provided by you. This is your SOM.
How to Calculate PAM, TAM, SAM,SOM?
PAM – (Total available Customers in Market + Total potential to be customers in market) * Average Revenue/customer
TAM- Total Customers in Market * Average Revenue/customer
SAM – Target Segemnt of TAM * Average Revenue/customer
SOM – Last year’s market size * This year’s SAM
Summary
While PAM and TAM reflect the enormous potential that can be captured, SAM and SOM help in giving a more realistic and actionable perspective. Data can usually be collected through secondary sources such as publications, government records and even through online surveys. Market analysis is important to give the business a direction and raise funds if enough potential is found.
Market sizing is indispensible for both, established businesses and startups. Especially, for startups, investors prefer an established model for estimating the market size, namely the TAM, SAM and SOM. Such standardization reduces the risk of misunderstanding, provides the data baseline for investors to evaluate a business opportunity, and articulates the short, mid and long-term growth potential. The SOM shows what can be achieved with the business idea in the short term. The SOM / SAM ratio describes the market share initially aimed for. Finally, the TAM shows the greatest possible market potential.
RSA Consultants is a team of Chartered Accountants and other Professionals, rendering services in the field of Income Tax, GST, Indirect Tax, International Taxation, Corporate Law Advisory, Accounts & Assurances and Consultancy related to Startup & Entrepreneurship since 2011.
Our team can help your Startup to make application under the SISFS. Kindly get in touch with us via WhatsApp at 9723400220
+91 97234 00220
