PAM, TAM, SAM, SOM: Market Sizing and Marketing Strategy
Market sizing is the process of estimating the potential demand and revenue for a product or service in a specific market.
It is an important tool for entrepreneurs, investors, and marketers to evaluate the attractiveness and feasibility of a business opportunity.
There are different ways to measure the size of a market, but one of the most common frameworks is the PAM, TAM, SAM, SOM model.
What are PAM, TAM, SAM, and SOM?
PAM stands for Potential Available Market, which is the total economic value of an overall market, such as the worldwide market for software. It is the maximum possible revenue that could be generated if everyone in the market bought the product or service. However, PAM is usually too broad and unrealistic to be useful for most businesses.
TAM stands for Total Addressable Market, which is the potential revenue within a specific market segment that is relevant for the product or service. It is the subset of the PAM that can be served by the product or service, given its features, benefits, and target customers. For example, the TAM for cloud-based ERP software for the pharmaceutical industry is smaller than the PAM for all software, but more meaningful for a business that offers such a solution.
SAM stands for Serviceable Addressable Market, which is the potential revenue within the TAM that can be reached by the business, given its capabilities, resources, and limitations. It is the portion of the TAM that is accessible by the business and its competitors, taking into account factors such as geographic coverage, distribution channels, pricing, and customer preferences. For example, the SAM for a cloud-based ERP software provider that operates only in the Northeast U.S. is smaller than the TAM for the same product category, but more realistic for the business.
SOM stands for Serviceable Obtainable Market, which is the potential revenue within the SAM that can be captured by the business, given its competitive position, market share, and growth potential. It is the realistic estimate of the market opportunity for the business, based on its current and projected performance. For example, the SOM for a cloud-based ERP software provider that has a 10% market share in the Northeast U.S. is smaller than the SAM for the same region, but more indicative of the actual revenue potential for the business.
How to calculate PAM, TAM, SAM, and SOM?
There are two main methods to calculate PAM, TAM, SAM, and SOM: bottom-up and top-down. The bottom-up method starts with the smallest units of information, such as the number of customers, the number of units sold, and the average price per unit, and multiplies them to get the market size. The top-down method starts with the largest sources of information, such as industry reports, market surveys, and census data, and applies assumptions and filters to narrow down the market size.
The bottom-up method is more accurate and reliable, as it is based on actual data and customer behavior. However, it requires more effort and resources to collect and analyze the data. The top-down method is more convenient and fast, as it uses existing and readily available information. However, it is more prone to errors and biases, as it relies on assumptions and estimates.
The choice of method depends on the availability and quality of data, the purpose and scope of the analysis, and the level of detail and precision required. In general, it is advisable to use both methods and compare the results to validate the assumptions and check the consistency.
How to use PAM, TAM, SAM, and SOM for marketing strategy?
PAM, TAM, SAM, and SOM are useful for developing and evaluating a marketing strategy, as they help to:
Identify and prioritize the most attractive and feasible market segments for the product or service
Assess the market potential and revenue opportunity for the business
Set realistic and achievable goals and targets for the business
Benchmark the performance and growth of the business against the market and competitors
Allocate and optimize the marketing resources and budget for the business
Communicate and demonstrate the value proposition and competitive advantage of the product or service to customers and investors
To use PAM, TAM, SAM, and SOM for marketing strategy, the following steps are recommended:
Define the market segment and scope for the product or service, based on the customer needs, pain points, and characteristics
Calculate the PAM, TAM, SAM, and SOM for the market segment and scope, using the bottom-up and/or top-down methods
Analyze the PAM, TAM, SAM, and SOM to understand the market size, growth, trends, drivers, and challenges
Compare the PAM, TAM, SAM, and SOM to evaluate the attractiveness and feasibility of the market segment and scope for the product or service
Select the optimal market segment and scope for the product or service, based on the PAM, TAM, SAM, and SOM analysis and the business objectives and capabilities
Develop and implement a marketing strategy for the product or service, based on the selected market segment and scope, and the PAM, TAM, SAM, and SOM estimates
