In this article, we will break down the three core market sizing components—Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM)—and explore how they translate into financial projections. We will also discuss the role of financial modelling consulting services in refining these estimates and ensuring accuracy in business planning.
Understanding Market Sizing Models: TAM, SAM, and SOM
Market sizing is typically divided into three levels:
- TAM (Total Addressable Market): The total demand for a product or service in a given industry.
- SAM (Serviceable Available Market): The segment of TAM that a company can realistically serve, considering its business model and capabilities.
- SOM (Serviceable Obtainable Market): The portion of SAM that a company can realistically capture, considering competition and market entry barriers.
These three components form the foundation of revenue forecasting, investment valuation, and strategic decision-making. Let’s take a closer look at how each plays a role in financial projections.
1. Total Addressable Market (TAM): The Big Picture
Definition:
TAM represents the maximum potential revenue opportunity if a company were to capture 100% of the demand in a market. It is a theoretical upper limit that defines the full potential of an industry.
Example:
If you are launching a ride-hailing app in the UK, your TAM would include the entire transport and mobility market, including taxis, buses, and private vehicle hire.
How TAM Translates into Financial Projections:
- Baseline Estimation: TAM helps establish a broad industry benchmark for growth potential.
- Investor Interest: Large TAM figures indicate a scalable opportunity, making a business attractive to investors.
- Long-Term Strategy: Even if a business cannot capture the entire TAM, understanding the full market size helps set long-term objectives.
Financial Modelling Considerations:
- Conduct top-down market analysis, using industry reports and macroeconomic data.
- Use bottom-up validation, where company-specific growth projections align with market trends.
2. Serviceable Available Market (SAM): The Realistic Scope
Definition:
SAM refines TAM by considering the company’s target customer segments, geographic focus, and operational constraints. It represents the market portion that the business can effectively service based on its product offerings, distribution channels, and business model.
Example:
A UK-based ride-hailing app may exclude buses and private cars from its TAM, focusing only on urban ride-hailing customers. This refined market is its SAM.
How SAM Translates into Financial Projections:
- Revenue Forecasting: SAM allows businesses to make more accurate revenue estimates based on their operational focus.
- Market Penetration Goals: Companies set realistic penetration rates based on SAM rather than an overly ambitious TAM.
- Competitor Benchmarking: Understanding SAM helps businesses assess market share relative to competitors.
Financial Modelling Considerations:
- Use financial modelling consulting services to build detailed revenue models based on SAM-specific customer segments.
- Perform competitive analysis to understand realistic pricing and adoption rates within SAM.
3. Serviceable Obtainable Market (SOM): The Actionable Target
Definition:
SOM represents the realistic revenue opportunity within SAM that a company can secure in the near term, factoring in competitive dynamics, marketing efforts, and customer acquisition strategies.
Example:
For a ride-hailing app, the SOM could be the percentage of urban riders willing to switch from existing services (e.g., Uber, Bolt) to the new platform within the first three years of operation.
How SOM Translates into Financial Projections:
- Short-Term Revenue Estimates: Investors and business planners rely on SOM to estimate early-stage revenue potential.
- Go-to-Market Strategy Alignment: SOM influences pricing, promotional efforts, and customer acquisition costs.
- Break-even Analysis: Companies use SOM to project when they will recover costs and become profitable.
Financial Modelling Considerations:
- Estimate market capture rates based on historical industry adoption trends.
- Use customer acquisition cost (CAC) vs. customer lifetime value (LTV) models to assess sustainability.
- Work with financial modelling consulting services to stress-test SOM projections using different growth scenarios.
Bridging Market Sizing to Financial Projections
Once TAM, SAM, and SOM are established, they serve as a foundation for detailed financial forecasting. Here’s how to incorporate them into financial models:
1. Revenue Forecasting Based on SOM
- Determine the estimated customer base growth rate.
- Multiply the expected customer base by average revenue per user (ARPU).
- Adjust for factors like churn rate and market expansion.
2. Cost Modelling and Profitability Analysis
- Align operational expenses, customer acquisition costs, and overheads with revenue projections.
- Model scalability scenarios, including variable vs. fixed costs.
- Assess profitability through EBITDA and net profit margin analysis.
3. Scenario Planning for Investor Pitches
- Build best-case, base-case, and worst-case scenarios based on varying SOM penetration rates.
- Stress-test financial projections using sensitivity analysis.
- Showcase a 5-year financial model with milestones tied to SOM expansion.
The Role of Financial Modelling Consulting Services
Developing accurate market-sizing models and translating them into financial projections requires expertise in business analytics, financial modelling, and industry research. Many UK businesses and startups seek financial modelling consulting services to:
- Validate TAM, SAM, and SOM Estimates – Ensuring market assumptions align with real-world data.
- Develop Investor-Ready Financial Models – Creating financial projections that meet investor expectations.
- Optimize Pricing and Revenue Models – Fine-tuning revenue assumptions based on competitive analysis.
- Conduct Risk and Sensitivity Analysis – Identifying key risks and financial impact under different scenarios.
Using financial modelling consulting services, UK businesses can enhance the accuracy of their revenue forecasts, improve fundraising efforts, and make informed strategic decisions.
Market sizing is more than just a theoretical exercise—it is a critical input for financial planning, fundraising, and strategic decision-making. By breaking down TAM, SAM, and SOM and integrating them into financial projections, businesses can set realistic revenue targets, manage investor expectations, and develop data-driven growth strategies.
For UK companies looking to enhance their market sizing accuracy, partnering with financial modelling consulting services can provide the necessary expertise to build robust financial models, ensuring data-backed business decisions.
Whether you are a startup preparing for funding rounds or an established business exploring new markets, a structured approach to market sizing will significantly enhance your financial planning and strategic execution.