The Guide to TAM, SAM, and SOM: Definition and How to Calculate Them

Launching a new product invariably entails a degree of calculated risk. Questions such as "What if it doesn't succeed?" or "What if it fails to find its customer?" are common concerns among startups and new companies. Fortunately, you needn’t rely on guesswork; there is a method to mitigate these risks by calculating TAM, SAM, and SOM for your business idea.

TAM, SAM, and SOM calculations prove invaluable at various stages of your company's lifecycle. For startups, they provide benchmarks for success and help persuade investors. For established companies, they are instrumental in evaluating new ideas and allocating resources. Moreover, market sizing research can often reveal new opportunities and potential pivots for your business idea.

However, there are a plethora of pitfalls and misconceptions in calculating and applying TAM, SAM, and SOM. The provided guide ensures your calculations are precise and that you leverage these figures to benefit your business optimally. Let's delve deeper!
 

What is TAM, SAM, and SOM?

TAM, SAM, and SOM are acronyms representing metrics that describe the market size for your prospective product. They assist in estimating the potential market size, the accessible market, and the target market, respectively, guiding your expectations for market share and revenue.

The process of conducting market research and calculating TAM, SAM, and SOM is commonly referred to as a market sizing.
 

TAM (Total Addressable Market)

Total Addressable Market (TAM) refers to the broadest possible market for your product, encompassing all potential customers without considering limitations such as location, product specifics, or budget. This metric represents the total revenue you could achieve if you captured 100% of this market.

For instance, if you were to open a hairdressing salon, calculating your TAM would involve counting all the people globally who use hairdressing services. However, this calculation would not take into account factors such as a) the absence of your salon in every city, and b) the fact that potential customers already frequent other hairdressers.

TAM is a useful metric for understanding the potential scale of your business and for beginning to formulate your go-to-market strategy. However, it is far from realistic. No matter how well you execute your business strategy or how beloved your product becomes, you will never reach the TAM figure, as it presumes you are the sole provider with no competition.

SAM (Serviceable Addressable Market)

Serviceable Addressable Market (SAM) refers to the segment of the Total Addressable Market (TAM) that your product or service can realistically cover. While TAM is the broadest metric and doesn't account for location or product specifics, SAM focuses on the market you can geographically reach and those genuinely interested in your particular offering.

Let's revisit the hair salon example. Your TAM is extensive, but once you specify the city in which you operate and the type of hair salon, you will arrive at a more realistic SAM. For instance, if you plan to open a salon catering to individuals with curly hair in London, your SAM will be considerably smaller.
 

SOM (Serviceable Obtainable Market)

Finally, SOM (Serviceable Obtainable Market) represents the actual portion of the market you can capture with your current resources and strategy. This metric focuses on what you can realistically achieve based on the tools and capabilities at your disposal. To evaluate your SOM, consider the following factors:

• Your product, its niche, and its Unique Value Proposition (UVP)
• Your go-to-market strategy and distribution channels
• Your production capacity – you can't serve the market if you don't have enough products for all potential customers
• Your SAM and the level of market saturation
• Customer behaviour – how likely they are to adopt your product quickly and switch from other brands

While TAM and SAM are typically calculated before executing and launching the idea, SOM can only be determined after entering the market, as its calculation requires operational data (more on that later). Nevertheless, it is a crucial component of predicting your success and growth.

TAM vs SAM vs SOM: Key Differences

Why is TAM, SAM, and SOM Important for Your Business?

TAM, SAM, and SOM metrics are frequently a focal point of discussions in the context of investments and startups, yet they remain vital for any business, regardless of its stage of growth. Whether you’re exploring a new product concept or refining your go-to-market strategy, these metrics are invaluable for identifying opportunities and refining your approach.

Let's explore how TAM, SAM, and SOM can enhance your business.

Understand your market potential

TAM, SAM, and SOM provide valuable insights into potential revenue within a specific market, enabling you to evaluate whether entering the market is worthwhile. For instance, a significant gap between TAM/SAM and SOM may indicate a competitive market dominated by established players, suggesting that introducing your product and gaining customers will be challenging.

Set business objectives

TAM, SAM, and SOM assist in establishing benchmarks for your business to strive towards. By comprehending (TAM), you can set ambitious yet achievable long-term goals. SAM enables you to refine these objectives based on the portion of the market you can realistically serve, while SOM assists you in defining short-term targets aligned with your current capabilities.

Identify opportunities for growth

When assessing your TAM, SAM, and SOM, you may uncover fresh business prospects and potential pivots for your concept. For instance, a business might identify an unoccupied niche within its SAM that could be captured with minor enhancements to its product offering. Overall, conducting TAM, SAM, and SOM research and calculations helps sharpen your focus on market demands and illuminates growth opportunities.

Refine your go-to-market strategy

Once you've conducted the necessary TAM, SAM, and SOM research, leveraging these insights can significantly enhance your go-to-market strategy. These metrics play a pivotal role in guiding strategic decisions; for instance, TAM provides an overview of your market potential, SAM identifies the most viable target segments, and SOM ensures your efforts are concentrated on achievable market shares.

Furthermore, evaluating TAM, SAM, and SOM can be a point to start for competitor analysis, shaping both product development and marketing strategies. By gaining the insights into your target market’s size and characteristics, you can more effectively assess your competitors and identify opportunities to differentiate your product.

Allocate resources efficiently

Understanding your TAM, SAM, and SOM facilitates strategic resource allocation. It allows you to concentrate your efforts where they can generate the greatest returns, while avoiding unnecessary expenditure in less promising markets.

For instance, a company might opt to increase investment in marketing and sales activities to enhance brand awareness and expand its market presence within its SAM. Proactively making these decisions supports effective brand management from the outset.

Attract investors

Well-defined TAM, SAM, and SOM metrics can enhance investor confidence. They illustrate your thorough grasp of the market and a pragmatic approach to seizing opportunities, essential for securing funding.

Investors carefully assess TAM, SAM, and SOM for a balanced TAM, a realistic SAM, and a substantial SOM that indicates significant potential.

As your business progresses, revisiting TAM, SAM, and SOM aids in identifying new opportunities for growth. It enables you to access new markets, refine your strategy, and establish new objectives aligned with evolving market dynamics.

How to Calculate TAM, SAM, and SOM?

Calculating TAM and SAM typically involves two approaches, depending on how you gather your data. The first method utilises publicly available research conducted by industry analysts such as IDC or Gartner, known as the top-down approach. The market data from reputable sources assists you in evaluating TAM, which subsequently aids in calculating SAM and SOM.

Alternatively, you can opt for the bottom-up approach by conducting your own research or engaging a research agency. Here, you utilise your business data and specific market research to evaluate TAM, SAM, and SOM.

There’s also the Value Theory Approach, suitable for innovative products without an established market niche. For instance, consider trying to determine TAM for Facebook in the late 2000s, a product with no direct analogues at the time. This approach involves researching how much consumers would be willing to pay for the unique value your product offers.

The calculation aligns with the bottom-up approach, but instead of averaging sale prices, it involves assessing the price of a comparable product and the premium your superior product could command. Although these calculations are somewhat subjective and less precise than traditional TAM evaluations, they still enable you to evaluate the entire market for your product.

SOM, on the other hand, is typically calculated after your company has entered the market and relies on your own operational data. Therefore, the aforementioned approaches are rarely applicable to its calculation.

Useful resources for calculating TAM, SAM, and SOM include industry reports, market research data, financial statements from publicly traded companies within your sector, industry experts, and market research tools such as social listening and online monitoring tools.

With this understanding, let's explore in detail how each metric can be effectively calculated.

TAM (Total Addressable Market) Calculation

When calculating TAM, a top-down approach involves analysing industry data, market reports, and research studies to gauge the size of markets and their segments, aligning this information with your own business objectives to estimate your TAM.

However, the data in these reports may be too broad, describing a similar but not the identical market, or could be outdated.

For companies with ample resources, hiring a firm to conduct new research or assigning an internal team to the task allows for a bottom-up approach to TAM. Naturally, few startups are prepared to allocate their limited resources to extensive research, making the top-down approach more relevant for them.

TAM Formula

Regardless of your data source, the formula for calculating TAM remains consistent:

The number of customers is derived from market research, while annual revenue is typically determined based on your own company data. If this data isn’t yet available, it can also be sourced from industry assessments.

TAM calculation example

Let's illustrate this with an example of calculating TAM for software aimed at financial institutions to streamline their KYC processes. Suppose there are hypothetically 25,000 financial institutions worldwide that could benefit from such a solution, each spending £3 750 annually on KYC. Therefore, our TAM would be calculated as: 25,000 X £3 750 = £93.75 million. This figure represents the total potential revenue if your software were adopted by every financial institution globally.

SAM (Serviceable Addressable Market) Calculation 

When calculating SAM, you refine your analysis to obtain a realistic estimate of the potential sales volume for your product.

Expanding on our previous example, assume your KYC product offers features that particularly appeal to credit unions rather than banks. Although some private banks may still show interest in the solution, the SAM calculation would primarily focus on the number of credit unions in the market.

SAM Formula

SAM calculation example

According to Statista, there are approximately 440 credit unions in the UK that translates to 56% of all financial institutions. So, let's figure out SAM for our KYC software: £93.75 mln X 0.56% = £52,500,000

SOM (Serviceable Obtainable Market) Calculation

SOM is typically calculated for businesses already established in the market with paying customers. To calculate it, multiply your last year's market share by this year's SAM.

The market share is influenced by existing competition. For instance, if there are 5 major vendors of KYC software for financial institutions, with 4 offering special features for credit unions, you’ve sold £500,000 worth of KYC software, your market share would be your last year's revenue divided by SAM i.e. £500,000/£93,750,000=0,0053 or 0.53% of the entire market.

If your revenue for the year exceeds your SOM, it indicates successful acquisition of some of your competitors’ market share. Conversely, if your revenue falls short of SOM, it suggests competitors are gaining ground, signalling a need to reassess your product and go-to-market strategy.

If you anticipate increasing your market share in the coming year through strategic initiatives, you can estimate SOM based on the market share you aim to capture.

For companies yet to enter the market, calculating SOM utilise a Value Theory Approach. This involves in-depth research into consumer trends and behaviour to forecast realistic revenue. Utilising the sales forecasting features of your CRM software may also assist in projecting future revenue.

SOM Formula

SOM Examples

The SAM for our KYC software was £52,500,000. Multiplying this by the market share we calculated earlier, i.e. £52,500,000*0.053=£2,777,500

Maximising Business Growth with TAM, SAM, and SOM Analysis

TAM, SAM, and SOM can be effectively utilised to drive business growth across various avenues, including exploring new markets, securing investors' confidence, and refining marketing and sales strategies. Here are some common applications of  TAM, SAM, and SOM:

• Identifying growth opportunities: TAM, SAM, and SOM assist in identifying potential opportunities for growth within current market or new market segments.
• Validating product ideas: These metrics offer insights into market size and revenue potential, assisting in validation of new business concepts.
• Developing a go-to-market strategy: By identifying the most attractive market opportunities and defining target customers, TAM, SAM, and SOM support the formulation of effective go-to-market strategies.
• Attracting investors:  Investors assess TAM, SAM, and SOM to gauge investment potential. Demonstrating a sizable and expanding market opportunity through these metrics can attract investor interest.
• Measuring progress:  Utilise TAM, SAM, and SOM to track achievements in expanding within existing markets or entering new ones, providing benchmarks for business growth.

Calculate TAM, SAM, and SOM for Strategic Growth

In summary, TAM, SAM, and SOM play distinct roles in evaluating market potential. SOM indicates short-term sales potential, SAM signifies the target market share, and TAM represents the potential at a broader scale. These metrics are crucial for validating your business concept and convince stakeholders such as investors or the company board to support it.

You can calculate TAM, SAM , and SOM using publicly available data or  through conducting thorough market research. The calculations assist in identifying new market opportunities and refining your go-to-market strategy.

For a seamless business approach that facilitates achieving SOM and capturing your SAM, consider Creatio for business automation. It optimises resources by automating routine tasks and consolidating all business data in one platform.

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