by John McGovern, CEO Grimes McGovern & Associates
TAM, or Total Addressable Market, is a term we see a lot of in M&A activity. It represents the maximum potential revenue a business can generate by capturing 100% of its target market, excluding any competition – real or imagined.
In simpler terms, it’s the total amount of revenue possible if every potential customer bought space or attended your conference/exhibition/event and no others.
As a formula, TAM is calculated by multiplying the total number of potential customers by the average revenue per customer.
While TAM is the broadest measure of market size, it’s often used in conjunction with Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM). SAM represents the portion of the market a company can realistically serve, while SOM is the actual market share a company can reasonably expect to capture in the short term.
Buyers want to know all three
Buyers want to know the numbers of all three acronyms to figure out how much potential an event has to grow should they invest resources in it. While TAM is more of a ‘wish’, SOM is a practical number to aspire to.
What is a TAM?
Taking a simple example to demonstrate the concepts – let’s assume you are launching a conference for CTOs (chief technology officers). Your TAM for paid attendees could be all the companies worldwide who have a dedicated CTO. Let’s assume that number is 50,000 companies or potential attendees. In revenue terms, your TAM would be 50,000 multiplied by the ticket price. If a ticket is $1000, the TAM would be $50 million. TAM is useful for long term planning and identifying growth opportunities.
What is a SAM?
Your SAM would be the CTOs you can actually reach and attract, based on your geography, language, industry, format and other factors.
Let’s say you are focused primarily on the US and Canada, and only 10,000 companies have CTOs in this region. This could be considered your SAM. If a ticket is $1000, the SAM would be $10 million.
What is a SOM?
Finally, your SOM would be the attendees you can attract when you account for constraints in marketing, sales staff, budget, brand awareness, competition and other factors. Let’s say you are able to reach 7,000 CTOs and get 2% of them to attend. This would give you 140 attendees and about $140,000 in revenue.
SOM, therefore, is rooted in actual performance. It accounts for the real-world business environment.
Using these metrics to set goals
Businesses can define their markets in extremely different ways. They may be conservative or liberal in their estimates. Also, no business may expect to capture all of their TAM, even if it is defined and estimated well. Using these metrics helps to set a benchmark for the business to plan ahead, set realistic goals and analyse performance – and sell for more.
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