TAM, SAM, SOM: Understanding Market Size for Your Business

TAM, SAM, and SOM represent three subsets of a business’s market: the total addressable market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). Start-ups use these key metrics to analyze the viability of their business model for fundraising purposes, and preexisting companies use them to vet new business ideas. TAM, SAM, and SOM may also help start-ups and investors assess the potential upside and risks of an investment opportunity.

The total addressable market, which is sometimes called the total available market, refers to the overall revenue opportunity that a product or service has if it achieves 100% market share. Essentially, TAM represents the money you’ll make if you sell to every customer who could potentially buy your product or service, regardless of any barriers or competition in the market.

Start-ups, entrepreneurs, and existing businesses may use TAM to assess the revenue opportunity inherent in a product or service and to determine how much effort and funding they should invest in a new venture. TAM can also help companies prioritize specific opportunities, products, or customer segments, and can provide a value proposition to interested investors or buyers, showing them what a company can potentially achieve if they expand into all segments of the global market.

To calculate the TAM, multiply the average annual revenue of the relevant product or service by the overall number of potential customers in the entire addressable market. Remember, these are the customers your product or service will reach if you achieve 100% market share.

Businesses may arrive at these numbers in several ways:

• Top-down approach: Top-down calculations reach the number of potential customers via a process of elimination. The business typically starts with a target market of a known size—for example, a pet food business might start with the number of pet owners worldwide—and then eliminates irrelevant segments using demographic, economic, and geographic assumptions using market data.
• Bottom-up analysis: Bottom-up analysis uses company data generated by early sales to estimate the overall market. To calculate TAM using this method, multiply the average sales price for your product or service by the number of current customers to determine your annual contract value (ACV). Then, multiply your ACV by the total number of potential customers worldwide to determine your TAM.
• Value theory: Value theory may provide less accurate calculations because the numbers come from conjecture about a buyer’s willingness to pay for your product or service, and often relying on guesswork and supposition. However, it can be useful if you want to get a sense of the TAM when considering upgrades for current products, or if you’re planning on introducing a novel product that will create its own market category.

The serviceable available market, which may be referred to as the serviceable accessible market, represents the portion of the total addressable market, or TAM, that you can realistically acquire with your current business model. This is the portion of the market that may actually buy your products or services or may purchase similar products or services from another business. For example, if you only offer your product or service in English, your SAM is the English-speaking portion of the TAM.

Essentially, SAM represents your product or service’s target group, and a well-defined SAM can help your company create efficient, effective sales and marketing campaigns. It can also show investors the potential of your business venture in the medium term.

You can calculate your SAM by tallying up the potential customers in your target market, factoring in barriers to potential sales such as competition, distribution capacity, and marketing reach. Once you’ve determined the number of potential customers, multiply that number by the average annual revenue each customer generates to determine your SAM.

The serviceable obtainable market represents the portion of the market your business can realistically serve. In other words, SOM identifies who will buy your product or service, so you can identify potential sales prospects.

• SOM calculations factor in restrictions to potential sales, including:
• Marketing reach
• Production capacity
• Distribution area
• Regional regulations and restrictions
• Competition and the likelihood of market share loss
• Natural barriers, including language and distance

To determine your SOM, you must first calculate the SAM. Next, divide the prior year’s revenue for your product or service by the SAM to determine the prior year’s market share. Finally, to calculate your SOM, multiply this percentage by this year’s SAM.

TAM, SAM, and SOM are effective market analysis tools for small businesses, entrepreneurs, and investors. These metrics provide vital information, helping parties make informed business decisions, execute fundraising campaigns, and prioritize opportunities. Common situations in which businesses and potential investors may benefit from TAM, SAM, and SOM calculations include:

• Small businesses that want to bring new products to market but need to know how much funding the venture will require
• Potential entrepreneurs who want to analyze a business idea’s worthiness
• Start-ups that want to gauge market potential so they can prioritize new products or services
• Established businesses conducting general market research, determining business valuations, or looking for entry points into specific markets
• Venture capitalists researching the upsides of potential investments
• Businesses that want to prove the viability of their business model to potential buyers

Early-stage start-ups preparing pitch decks for fundraising
If you’re starting or growing a business, TAM, SAM, and SOM have numerous applications and can be helpful indicators of your company’s potential and the viability of the target market in general.

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