Understanding your market is key to creating a successful business model as an entrepreneur, both in the early and later stages of building a business. A business model requires ongoing development, and market research plays a crucial role in shaping it. Market and industry definitions are essential for answering key questions, such as identifying the target market, knowing customer needs, and determining how to reach and retain them effectively.

One of the most effective ways to grasp the size and potential of your target market is to use the TAM, SAM, and SOM models. These metrics help businesses assess market opportunities and develop strategies to achieve sustainable growth.

TAM (Total Addressable Market): TAM represents the total market demand for a product or service. It includes everyone who could potentially use your product globally, assuming there are no market constraints such as competition or access.

While TAM represents the broadest possible view of your market, it does not directly impact short-term business decisions. TAM is more advantageous for investors and long-term strategic thinking, indicating the overall potential of the market and guiding future expansion plans.

Imagine you’re launching a new drone hardware company. TAM would represent the entire global population that could theoretically buy your drones, which could be anyone who can fly a drone and has the buying power.

SAM (Serviceable Available Market): SAM refers to the segment of TAM that your product or service can serve. This is typically limited by geographic, regulatory, or business constraints, but it represents a more realistic picture of your opportunity.

SAM is the more immediate, realistic target for most businesses. Based on factors such as geography, product availability, and consumer behavior, this market segment is the one you can serve today. SAM helps you shape marketing and operational strategies by narrowing your audience.

Using the drone hardware example from above, the SAM would narrow this down to a specific geography and audience. For example, if you’re only distributing in North America, your SAM would be the number of potential customers in that region who are likely to purchase a drone.

SOM (Serviceable Obtainable Market): SOM is the portion of SAM that you can realistically capture. This figure considers competition, marketing budgets, and operational capacity.

SOM is where business reality meets ambition. Given current resources and competition, SOM defines how much of the market you can reasonably expect to capture in the short term. Knowing your SOM is crucial for short-term revenue planning, resource allocation, and sales strategies.

In our drone hardware example, SOM looks at how much SAM you can realistically capture. If your company can produce 1,000 drones annually and has other established competitors, your SOM might only represent a fraction of the market – e.g., 5% of North American buyers.

Market research is indispensable for developing accurate TAM, SAM, and SOM models. Here’s how market research plays a role in refining each of these metrics:

Defining High-Value Customers (SAM and SOM): Market research helps you determine your high-value customers and where to find them. This can involve segmenting your audience based on location, buying habits, and industry trends. Accurate customer data helps you refine your SAM and SOM estimates.

Understanding Market Position (SOM): Competitive analysis through market research lets you assess how much of the market you can realistically capture, shaping your SOM. You can track competitors, understand market trends, and identify gaps where your product can offer a unique value proposition.

Continued Market Adaptation: As your business grows, market research ensures that your understanding of TAM, SAM, and SOM evolves.

Drone Industry Insights publishes market reports for evaluating SAM and SOM in the drone industry using unique, first-hand data – also known as the bottom-up approach. The resulting in-depth drone industry reports allow you to refine these estimates continually, giving you an edge as the market changes.

Understanding your TAM, SAM, and SOM is critical to shaping your business model and growth plan. While TAM helps paint a picture of the larger opportunity, SAM narrows your market potential, and SOM enables you to define realistic revenue goals. The deeper you go, the more details you require, which means access to primary/exclusive market information. Providing access to these sources is at the core of Drone Industry Insights’ work.

Alongside these metrics, market research informs you about drone industry trends, competitive movements, and customer needs. Access to reliable market research ensures you can refine your business strategies and stay ahead of the competition.

Effective market research will give you a clear roadmap for your entrepreneurial journey, whether you’re just starting or looking to grow your business. Remember that markets evolve, and so should your business model—market research ensures you stay aligned with industry changes and customer demand.

Interested in learning more? Stay updated with the latest market trends by exploring Drone Industry Insights, which gives you access to industry reports and market studies tailored to your needs.