Overview of Market Segmentation:

As we've just heighted above, serviceable addressable market is best understood through the TAM-SAM-SOM framework. This framework looks at how a business might segment it's market in an attempt to build a better Customer Acquisition Strategy.

Market segmentation is a fundamental strategy that helps businesses identify and target specific groups within a broader market effectively. By breaking down a market into smaller, more manageable segments, businesses can allocate resources more efficiently, tailor their messaging to particular audiences, and ultimately increase their chances of success.

This approach divides the market into three primary categories:

1. Total Addressable Market (TAM): The Total Addressable Market represents the largest possible market for a product or service, assuming no constraints in competition, market reach, or resources. TAM is a critical starting point for understanding a product's potential scale in an ideal world where every possible customer is accessible. Businesses often calculate TAM by analyzing industry data, consumer trends, and the value of all products or services sold within a category. It sets the upper limit on the size of a market opportunity. To learn more about TAM, we recommend our guide: Total Addressable Market (TAM).
2. Serviceable Addressable Market (SAM): The Serviceable Addressable Market narrows down from TAM to include only the portion of the market that a business can realistically serve based on factors like geographic reach, target demographics, and operational capabilities. For instance, while a global market may exist for a product, a company with limited distribution channels may only serve specific locations. SAM identifies where a company's efforts are most feasible, helping to refine its focus and create attainable goals. To learn more about SAM, we recommend out guide: Serviceable Addressable Market (SAM).
3. Serviceable Obtainable Market (SOM): The Serviceable Obtainable Market is the most refined segmentation and focuses on the realistic share of the SAM that a business can expect to capture. Calculating SOM requires a thorough analysis of competition, market conditions, and internal resource limitations. It's a practical assessment of what can be achieved in a given timeframe, based on a company’s capabilities and strategic positioning. By understanding SOM, businesses can set achievable sales targets and focus their marketing efforts precisely where they have the greatest potential to succeed.

By clearly distinguishing between TAM, SAM, and SOM, businesses are better equipped to make strategic decisions, effectively allocate resources, and set realistic goals for market share.

How to Calculate a Serviceable Addressable Market (SAM)

Calculating your Serviceable Addressable Market (SAM) begins with narrowing down your Total Addressable Market (TAM) to focus on the portion you can realistically serve based on your business's capabilities. TAM represents the entire market demand for your product or service, but your SAM factors in the limitations of your resources, geographic reach, and specific customer segments.

1. The first step is to define your target audience and geographic scope clearly. Identify the customers who fit your ideal buyer profile, considering demographic, behavioral, and psychographic data. Next, analyze the competition within your chosen market and focus on the segment that aligns best with your unique value proposition. Tools like market research reports, customer interviews, and industry analysis can provide valuable insights here.
2. Once you’ve defined your addressable segment, calculate the revenue potential. This involves multiplying the total number of potential customers in your market segment by the average revenue per customer (ARPC) specific to that group. For businesses offering multiple products or services, consider using weighted averages to account for different pricing tiers or consumption patterns.
3. Lastly, refine your data using market trends, consumer behavior forecasts, and external constraints such as regulatory or operational limits. This ensures the SAM calculation remains realistic and actionable for strategic decision-making. Regular updates to your SAM are also critical as markets evolve, and your business grows.

Example Serviceable Addressable Market Calculation:

For example, consider a company that develops a subscription-based fitness app targeted at working professionals aged 25-45 in urban areas. Based on demographic research, there are 10 million individuals in this age group within the target geography. After analyzing psychographic data, the company identifies that 30% of this demographic are likely to subscribe to a fitness app. This narrows the potential customer base to 3 million people. If the company charges $120 annually for its subscription, the average revenue per customer (ARPC) is $120. Multiplying the ARPC by the addressable customer base (3 million people) yields a serviceable addressable market of $360 million. This simplified example demonstrates how combining market data, consumer insights, and pricing models can help determine your SAM.

Recommended Resources:

• Total Addressable Market (TAM)
• Serviceable Obtainable Market (SAM)
• Customer Acquisition Strategy
• Go-To-Market Strategy