Are you struggling to create realistic customer projections for your business or startup? One way to identify which market to enter would be to determine the addressable markets.
The addressable market can be categorised into three: Total Addressable Market or Total Available Market (TAM), Serviceable Addressable Market (SAM) and Serviceable Obtainable Market (SOM).
- TAM is the total market demand for a product or service in a location or region.
- SAM refers to the portion of TAM that a company’s products or services can potentially serve.
- SOM is the percentage of SAM which is realistically reachable. This is also known as the target market.
For example, let us assume you want to set up a skincare brand. Before launching your product, you conducted market research and discovered that the total sales generated in Nigeria’s beauty and personal care industry amounted to $7.8 billion as of August 2023. $7.8b becomes the TAM.
Again, assuming the total sales of skincare brands amounted to $2.5b, that becomes the SAM. To determine the SOM, you can only target a proportion of the $2.5b, factoring in projected annual growth. A 100% SAM would only be achievable in the case of a monopoly.
The total addressable market indicates the size of a market. This enables business owners and investors to decide whether to enter the market. However, while a high TAM could be good, the SAM and SOM are perhaps more important metrics.
That is because it is necessary to balance the decision-making process by considering not just the TAM but the market penetration by competitors vis-a-vis consumer demand for the product.
