Market size: 4 key methods PAM, TAM, SAM, SOM

Table of Contents:

• What is PAM (Potential Available Market)?
• The Total Market: Understanding TAM
• Understanding SAM: What is it and how does it work?
• Understanding SOM: Sensible Market Size
• Top-Down and Bottom-Up Market Size Estimation Methods
• Key Aspects of Market Analysis

What is PAM (Potential Available Market)?

The Potential Available Market (PAM) provides a comprehensive view of the market size, taking into account future changes. This metric plays a key role for businesses, allowing them to determine the scope of opportunities for growth and development. PAM analysis helps companies assess their prospects and adapt strategies to maximize potential in growing markets.

There are 8,000 private clinics and medical institutions in your country. According to forecasts by the research company Gartner, the number of private medical organizations will increase by 10% in the next three years, which will lead to the emergence of 8,800 clinics. With a medical journal subscription costing 32,000 rubles per year, the potential addressable market (PAM) is 8,800 clinics multiplied by 32,000 rubles, which equals approximately 280 million rubles. This opens up significant opportunities for growth and development in the medical publishing industry, given the growing interest in private healthcare.

PAM provides the ability to analyze global market size and dynamics. This metric not only reflects the current market status but also predicts potential future changes, including both growth and decline. This is an important indicator that helps assess your product's market prospects and shape its promotion strategy.

In slowly growing industries, the PAM size is often similar to the total addressable market (TAM). However, for startups in innovative sectors, where annual growth can reach 100%, forecasting the PAM for several years ahead becomes especially important. A PAM assessment allows startups to better understand their market potential and adapt their strategies to successfully scale.

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Total Market: Understanding TAM

TAM (Total Addressable Market) refers to the total market size in which your product can be sold. This important metric covers all potential customers, including those who already prefer competitors' products and those who do not use similar products. Understanding TAM allows companies to better assess market opportunities, determine their go-to-market strategy, and adapt their offerings to attract new audiences. Determining TAM also helps in business scalability planning and investment decisions, as it demonstrates the full potential of the market for growth and development.

There are 8,000 medical clinics in the country. With a subscription to a medical accounting journal costing 32,000 rubles, the total addressable market (TAM) would be approximately 256 million rubles. This demonstrates significant potential for growth and development in the medical and accounting services sector. The value of TAM (Total Addressable Market) is not limited to a numerical indicator. This metric illustrates a company's maximum growth potential and the product's prospects if it manages to capture the entire market. In practice, achieving 100% TAM is extremely difficult, and even achieving 10% of this value is considered a significant achievement for most companies. The exception is monopolized markets, where such results can be achieved. Understanding TAM is important for strategic planning and assessing market opportunities, which contributes to effective business development.

Using TAM (Total Addressable Market) analysis allows companies to assess their potential for further growth in the market. It is a key element in the strategic planning process, allowing them to identify new opportunities and risks, and optimize resources to achieve maximum profitability. Understanding the size and dynamics of the available market helps organizations formulate sound strategies and make informed decisions about expansion.

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Understanding SAM: What is it and how does it work?

SAM (Served/Serviceable Available Market) is an important metric reflecting the available market size, which is a share of the total addressable market (TAM). This metric helps you understand how much money is actually spent on products or services similar to your offering. SAM focuses on direct competitors and similar solutions, allowing for a more accurate assessment of market opportunities and identification of growth prospects. SAM analysis facilitates strategic planning and optimization of marketing efforts by providing a deeper understanding of the target audience's needs.

In the context of analyzing the single-person wheelchair market, SAM (Serviceable Available Market) represents the total sales volume of these products. Similarly, for legal information systems designed for lawyers, SAM corresponds to the sales volume of these specific systems. Thus, understanding SAM allows for a more accurate assessment of market potential and identification of the target audience for the relevant products.

Let's consider a practical example. There are 8,000 private medical institutions in the country that can purchase a subscription to an online accounting journal. However, according to analytics, only 30% of them actually make such purchases. These figures are based on analytics and survey results, which underscores the importance of studying the needs of this target audience. Information about potential clients can help develop marketing and sales strategies aimed at increasing the number of subscribers and improving financial management in healthcare institutions.

There are many reasons why 70% of organizations cancel their subscriptions. The main reasons include a lack of appropriate budget lines and an underestimation of the importance of accounting services. To calculate the addressable market for this product, you can use the following formula: 8,000 (the total number of organizations) multiplied by 30% (the share of users) multiplied by 32,000 rubles (the subscription cost). The result is 76.8 million rubles per year. This figure highlights the growth potential and the importance of raising awareness of accounting services among organizations.

There is an alternative method for calculating market potential. Specialized consulting firms can provide up-to-date statistics on services purchased by healthcare institutions. For example, if, according to their data, clinics spend 56 million rubles annually on accounting journals, then this amount can be considered your service addressable market (SAM). This approach allows you to more accurately assess market opportunities and adapt business strategies to the real needs of the industry.

SAM, or Serviceable Available Market, represents the market size your company could potentially occupy if it manages to displace direct competitors. This metric reflects the maximum size of the niche in which the business operates. It is important to note that SAM does not include consumers who could purchase a product, but for whatever reason do not. Thus, understanding SAM helps companies identify real growth opportunities and go-to-market strategies, focusing on those segments they can effectively serve.

Understand SOM: Realistically Achievable Market Size

SOM, or Serviceable & Obtainable Market, represents the real market size your company can cover. This metric is a share of the broader SAM (Serviceable Available Market) and illustrates the potential sales you can make using available resources and tools. Understanding the SOM helps businesses assess their capabilities and strategically plan their development, focusing their efforts on achieving maximum results within the available market. Determining the SOM is an essential step for effectively managing resources and making informed marketing and sales decisions. For a deeper understanding, let's look at a specific example. Our online magazine's primary sales channel is direct calls to clients. However, 70% of clinics show no interest in purchasing accounting journals. If a manager successfully contacts one of the remaining 30%, the conversion rate is 10%. This means that one in ten clinics that show interest in an accounting journal becomes our client. This analysis allows us to optimize our sales strategy and better understand the needs of our target audience.

When analyzing SAM, which covers 2,400 medical organizations interested in purchasing accounting magazines, we can assume that by calling all clients, we will receive approximately 240 new clients, which is 10% of the total. With a subscription price of 32,000 rubles, total revenue will be 7.7 million rubles. This value will constitute our SOM.

The value of SOM (Serviceable Obtainable Market) is to determine the real market size that your company can develop with the current strategy. This metric excludes potential clients who are not accessible to the company. SOM takes into account the level of competition, conversion rate, and other factors affecting sales. Understanding SOM allows companies to more accurately plan their marketing and sales strategies, as well as optimize resources to achieve maximum results in the target market.

To achieve a given market size, it is critical to implement effective marketing strategies. To realize the SOM metric, it is necessary to conduct an in-depth analysis of the target audience. This will allow you to develop an effective action plan that will help you outperform competitors and gain market share. A proper understanding of customer needs and preferences is the foundation for the successful promotion of products and services.

Market Size Assessment Methods: Top-Down and Bottom-Up

Market assessment is a key step for the successful functioning of a business. There are two main approaches to analyzing metrics such as PAM, TAM, SAM, and SOM: the top-down method and the bottom-up method. Each of these methods has unique characteristics and can be used depending on the available data and market specifics. The correct choice of analysis method allows you to more accurately identify potential opportunities, assess risks, and develop a strategy for promoting your product to the target market.

This method begins with a thorough analysis of available statistical data on the market as a whole, which allows you to identify significant segments. It is important to consider several key aspects:

• Using verified and up-to-date sources of information.
• Understanding market segmentation, especially in the absence of direct research for calculation.

In this example, we will analyze the use of an online accounting journal. An online accounting journal is an effective tool for accounting and financial management. It allows you to automate processes, reduce the likelihood of errors, and provide convenient access to financial information at any time.

With an online journal, accountants can track income and expenses, create reports, and analyze the company's financial position. Ease of use and accessibility from anywhere make this tool indispensable for modern businesses.

Furthermore, an online journal ensures data security through encryption and regular backups. This helps prevent information loss and protects it from unauthorized access.

Thus, an online accounting journal is an important element for effective financial management and analysis, which contributes to more informed decision-making.

• Multiply the number of medical organizations by the subscription price - this is TAM.
• Assume that 30% of companies are willing to purchase the journal. Multiply TAM by 30% - we get SAM.
• Considering the presence of four competing journals, we can assume that we will occupy 20% of the market. Multiply SAM by 20% - we get SOM.

This method is used in situations where there is sales funnel data, as well as important key metrics such as conversion rate and sales costs. The process begins with calculating SOM (Serviceable Obtainable Market), after which we move on to SAM (Serviceable Available Market), TAM (Total Addressable Market) and PAM (Potential Available Market). In most cases, the results obtained using the bottom-up approach are less optimistic than those obtained using the top-down approach.

Market assessment for an online accounting magazine is an essential step for the successful launch and development of a project. First, you need to conduct a target audience analysis. Determine who your potential readers are: accountants, financial directors, entrepreneurs, or students. Study their needs and interests to create content that will be useful to them.

Next, it's worth researching your competitors. Study existing online accounting magazines, analyzing their content, structure, audience size, and promotion methods. This will help you identify the strengths and weaknesses of your competitors, as well as determine your magazine's unique selling proposition.

Don't forget about current trends in accounting. Keep up with changes in legislation, new technologies, and accounting methods. This will allow you to offer readers fresh and relevant content that will be in demand.

It's also important to use keyword analysis and SEO tools. Identify the most popular queries among your target audience and integrate them into your magazine's content. This will help increase your resource's visibility in search engines and attract more visitors.

Ultimately, a comprehensive approach to market assessment, including analysis of the target audience, competitors, current trends, and SEO optimization, will be key to the successful launch and development of an online accounting magazine.

• There are 8,000 clinics on the market. If every hundredth clinic purchases a subscription, then by calling all the clinics, we will receive 80 clients. Multiplying this by the subscription cost—32,000 rubles per year—gives us a SOM of 2.56 million rubles.
• Based on our call results, we know that 30% of clinics purchase accounting magazines. Therefore, the SAM is 2,400 clinics or 76.8 million rubles per year if we displace competitors.
• The total number of medical organizations is 8,000. Multiply by the subscription price and we get a TAM of 256 million rubles if we learn to sell the magazine to those who don't yet buy it.
• Every year, the number of private medical organizations increases by 10%. In three years, the expected number of organizations in PAM will be about 10.6 thousand and almost 340 million rubles.

The formulas for calculating SOM, SAM, TAM, and PAM depend on the available data and market specifics. In some cases, hypothetical values ​​​​may be used instead of exact numbers. The examples presented in this context demonstrate the key principles of the methodology, but do not take into account possible price fluctuations, which also affect the market valuation. When conducting an analysis, it is important to consider current data and market trends to obtain more accurate results.

Key Aspects of Market Analysis

• The PAM, TAM, SAM, and SOM methodology are an effective tool for assessing the market opportunity of your product or service. These four metrics help you understand: PAM (potential market size) is the maximum value, TAM (total market size) is the total available market, SAM (available market size) is the portion of TAM that can be served, and SOM (satisfactory market size) is the volume you can capture and sell.
• There are two main approaches to calculating these metrics: the top-down method and the bottom-up method. The first approach is based on analytical data and starts with the total market size (TAM), while the second is based on the actual performance of your business, starting with SOM. For a more accurate analysis, it is recommended to use both methods, as this will allow you to identify differences and better understand the real market situation.
• After calculating all six metrics, it is important to compare the results and analyze the reasons for the discrepancies, which will allow you to more accurately determine your market opportunities.
• It should be remembered that the PAM, TAM, SAM, and SOM methods provide only hypothetical market size values. These figures serve as a guide for assessing your project's prospects, but do not guarantee accuracy.

Planning a startup launch? Explore other valuable resources from Skillbox Media to help you through the process. We offer information and resources to help you effectively grow your business and avoid common mistakes.

• How and why to develop an MVP (minimum viable product)
• How to build a startup team that will work for a year or more
• How to launch a successful startup using a business model
• How to find an unoccupied niche for business using the blue ocean strategy
• How to create a product that customers really need