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Serviceable Available Market

Updated on April 11, 2024
Article byPriya Choubey
Edited byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Serviceable Available Market (SAM)?

The Serviceable Available Market or Serviceable Addressable Market (SAM) refers to the size of a company’s target audience or potential customers it can reach, given specific assumptions about resources and accessibility. It reveals the business volume and revenue a company can aim for in the long run by expanding its operations in this market.

Serviceable Available Market

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The Total Available Market (TAM) highlights the entire market an enterprise could target if it had inexhaustible resources, extensive networking options, and unlimited manpower. By defining SAM, companies outline a specific segment of the TAM that they can effectively target. It represents the market segment that aligns with a business’s capabilities, resources, and strategic focus. Analyzing the Serviceable Obtainable Market (SOM) is crucial for assessing the practically reachable market size, taking into account all influencing factors.

Key Takeaways

  • The Serviceable Available Market or Serviceable Addressable Market (SAM) is the potential target market out of the Total Available Market (TAM) that a company can aim to capture in the long run.
  • It is a blueprint of the size of an achievable customer base and revenue possibilities for a business.
  • SAM is a vital metric for entrepreneurs adopting a practical approach to evaluate potential opportunities and finalizing their long-term strategies.
  • The Serviceable Addressable Market is larger than the Serviceable Obtainable Market. SOM is the portion of SAM a business can realistically capture in the short run.

Serviceable Available Market Explained

The Serviceable Available Market is a percentage or a small portion of the Total Addressable Market (TAM) a company can target. The key is to identify the Serviceable Addressable Market because reaching the TAM is an ambitious but unreasonable plan.

A market segment analysis offers insight into the revenue generation and growth potential a company can meet if the business covers the Serviceable Addressable Market entirely. It views the overall target market, irrespective of constraints like competition, market conditions, limited resources, and other barriers.

For this, a company examines its potential customer base and profit-making opportunities in a particular domain and/or geographical region. Such boundaries could be a city, state, country, foreign market, industry, product, or sector. The SAM reflects a company’s vision to adopt strategies that will likely make it successful in the long run. Hence, limiting the scope and extent of business is crucial.

Once a company analyzes and outlines the SAM after a thorough Serviceable Available Market study, it must focus on identifying the Serviceable Obtainable Market (SOM). This market indicates the audience a company can reach, given its existing level of resources and competence. It describes a company’s capacity when operating under normal and practical circumstances. Growing a business in a market identified as the SOM is logical, practical, and achievable.

The data required for analyzing the TAM, SAM, and SOM should come from a reliable source. The best way to gather the right information is to conduct market research through surveys, seek customer feedback, or hire professionals and experts for guidance. Moreover, entrepreneurs should adopt a practical approach while estimating these figures despite the burning desire to succeed beyond measure.

Since such data is often presented to partners, associates, creditors, and investors, being overenthusiastic and optimistic can mislead them and affect their judgment. Evaluating the situation accurately and arriving at the right numbers is important. Leaders must also remember these are not just numbers but targeted figures that will need to be achieved over a given period.

While business strategy and operations plan can be based on the SAM, the SAM figures derived using the Serviceable Available Market method are only an estimation. The SAM can change as market conditions change. Hence, data gathering and analysis is an ongoing process throughout the life of a business. Consistent analysis ensures accuracy and helps leaders make sound business decisions.

Estimating the potential revenue through SAM is a major challenge for a business, specifically for startups. However, it can become more complicated if entrepreneurs do not focus on a particular market segment or lack general business clarity.

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How To Calculate?

Companies, especially startups new to the market, must outline their Serviceable Available Market to understand their target customers and potential returns. Here are the two ways of computing SAM:

1. Bottom-Up

It is a more reliable method of computing SAM if the company is already generating revenue. It is based on primary data. The steps involved are:

  1. First, determine the Annual Contract Value (ACV) by multiplying the number of current customers by the average sales price.
  2. Next, find the value of the Total Available Market (TAM) by multiplying the ACV by the total number of potential sales avenues.
  3. Find the target market segment—a certain percentage of TAM.
  4. Finally, multiply the targeted segment with the ACV to get the value of SAM. The formula: SAM = Targeted Market Segment of TAM * ACV

2. Top-Down

For startups, it is better to apply the top-down method, which considers the secondary data sources. The following steps are relevant in such cases:

  1. Identify the specific customer segment or geographic area to be analyzed.
  2. Next, figure out the maximum product price a customer will likely incur for the product.
  3. Then, ascertain Total Available Market (TAM) by multiplying the total market size by the maximum product price.
  4. Now, estimate the target market segment, which is a percentage of TAM.
  5. Lastly, multiply the target market segment by the maximum product price. The formula for SAM is SAM = Targeted segment TAM * Maximum product price.

Examples

Given below are some examples of Serviceable Available Markets (SAM):

Example #1

Suppose a company offering subscription-based streaming services catering to a specific language, say, French, considers TAM as every user who opts for subscription-based online streaming. However, the percentage of users streaming shows or web series in French is limited. When the company surveyed its users, it realized that only 2% of its users stream content in the French language. Thus, the company reported it could only target these 2% per the SAM analysis.

Example #2

Assume a cloud storage solutions business targets small-to-medium-sized businesses in the pharmacy industry. Suppose the TAM is 10000 such businesses, but the target market segment is only 10%. If the maximum annual price the company pays for the service is $3000, find the SAM.

Solution:

SAM = Targeted segment TAM * Maximum product price

SAM = (10% of 10,000) * $3,000 = $30,00,000

Therefore, the target market segment of SAM is 1000 SMEs, which has the potential to yield a revenue of $30,00,000.

Importance

The Serviceable Available Market (SAM) plays a vital role in the success of businesses for the following reasons:

  • Defines Target Market: It represents the portion of the Total Addressable Market (TAM) a company can realistically target and effectively serve.
  • Meets Customer Expectations: By outlining the SAM, businesses can identify specific customer segments and design or modify their products or services to cater to their needs.
  • Facilitates Decision Making: It helps make informed business decisions, including resource allocations, marketing strategies, and expansion plans, leading to improved efficiency, growth, and profitability.
  • Brings Sustainability: Focusing on the SAM reduces the risk of failure by targeting a more realistic and manageable market share, thereby increasing the likelihood of sustainable growth in the long run.
  • Attracts Investors: Startups and budding enterprises can use the data to pitch their business idea to investors to secure funding.

Serviceable Available Market vs Serviceable Obtainable Market

Serviceable Available Market and Serviceable Obtainable Market are essential data points for a company making key decisions about the target audience and revenue potential. However, certain differences can be observed. They are:

BasisServiceable Available Market (SAM)Serviceable Obtainable Market (SOM)
DefinitionSAM refers to the market demand for a specific product or service. It includes all potential customers who need the offering and are financially sound to purchase it.SOM represents the achievable portion of the served available market of a company based on the resources available.
InterpretationThe potential customer base or target market size and maximum revenue possibilities can be derived from this analysis.The achievable target market and revenue with the available resources can be derived from this analysis. 
Subset ofIt is a subset of the Total Available Market (TAM). It is a subset of the Serviceable Available Market (SAM).

Formula
SAM = Targeted Market Segment TAM * Annual Contract ValueSOM = Last year’s share * Current year’s SAM
Factors and ConstraintsIt does not consider constraints like competition, barriers, or market conditions.It considers factors like competition, market share, distribution channels, and other limitations that may influence a company’s ability to reach the serviceable available market.
BenefitsSAM allows businesses to gauge their potential market size and growth possibilities.SOM offers a more realistic estimate of the potential revenue a company can achieve, considering practical constraints and market conditions.
ScopeIt serves as a vision for long-term decision-making and strategy formulation. It facilitates short-term strategies and decision-making. 

Frequently Asked Questions (FAQs)

1. Who uses TAM, SAM, and SOM?

The TAM SAM and SOM are employed by budding entrepreneurs, companies penetrating new markets, and angel investors and venture capitalists who fund startups or initial-stage (nascent) businesses.

2. What is TAM, SAM, and SOM used for?

Total Available Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) are crucial sales metrics used to interpret the probable market size or customer base and revenue potential of a market. It facilitates businesses to frame suitable strategies for short-term sales targets.

3. What percentage of TAM is SAM?

The SAM is a small percentage of the TAM, which can be as low as 1-10% or as high as 25%. However, it varies from business to business and market to market. Companies often aim for SAM in the long run, say in 10 to 15 years; they devise strategies accordingly.

4. Can SAM equal TAM?

Businesses can only cater to a specific set of potential customers in the market, i.e., a particular sector, industry, or geographical location. Hence, SAM can never be the same as TAM in the real world since it is difficult to establish a pure monopoly due to excessive competition and limited resources.

This article has been a guide to What Is Serviceable Available Market. We explain its examples, how to calculate it, & comparison with Serviceable Obtainable Market. You may also find some useful articles here –

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