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

Launching a new product always carries a degree of calculated risk. Questions like, "What if it doesn't succeed?" or "What if it doesn't find its customer?" are common concerns among startups and new companies. Luckily, you don't have to guess, there is a way to mitigate these risks by calculating TAM SAM SOM for your business idea.

TAM, SAM, and SOM calculations assist at various stages of your company's lifecycle. For startups, they help establish benchmarks for success and help convince investors. For established companies, they are used to evaluate new ideas and allocate resources. Additionally, market sizing research can often reveal new opportunities and potential pivots for your business idea.

However, there are many pitfalls and misconceptions when it comes to calculating and applying TAM, SAM, and SOM. This guide ensures your calculations are accurate and that you use these numbers to benefit your business optimally. Let's dive in!

What is TAM SAM SOM?

TAM, SAM, and SOM are acronyms for metrics that describe the size of the market for your potential product. They help you estimate the potential market size, the accessible market, and the target market, respectively, which can guide your expectations for market share and revenue.

The process of market research and calculating TAM, SAM, and SOM is often called 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 like 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 launch a hairdressing salon, calculating your TAM would involve counting all the people worldwide who use hairdressing services. However, this calculation would not account for 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 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 number because it assumes you are the sole provider with no competition.

SAM (Serviceable Addressable Market)

Serviceable Addressable Market (SAM) denotes the portion of the Total Addressable Market (TAM) that your product or service can realistically cover. While TAM is the broadest metric and doesn't consider location or product specifics, SAM focuses on the market you can geographically reach and those genuinely interested in your specific product.

Let's revisit the hair salon example. Your TAM is vast, but once you specify the city you operate in and the type of hair salon, you'll obtain a more realistic SAM. For instance, if you plan to open a salon for people with curly hair in Seattle, your SAM will be significantly 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 behavior – 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 your idea, SOM can only be determined after entering the market since its calculation requires operational data (more on that later). Nevertheless, it is a critical component of predicting your success and growth.

TAM vs SAM vs SOM: Key Differences

Why is TAM SAM SOM Important for Your Business?

TAM, SAM, and SOM metrics are frequently discussed in the context of investments and startups, but they are crucial for a business at any stage of its growth. Whenever you consider a new product idea or update your go-to-market strategy, these metrics can help identify opportunities and gaps in your strategy.

Let's break down how TAM, SAM, and SOM can benefit your business.

Understand your market potential

TAM, SAM, and SOM offer valuable insights into potential revenue in a given market, helping you assess whether the market is worth entering. For example, a significant discrepancy between TAM/SAM and SOM can indicate a highly competitive market with established players, suggesting that introducing your product and acquiring customers will be challenging.

Set business goals

TAM SAM SOM help figure out the benchmarks for your business to strive for. By understanding (TAM), you can set ambitious yet achievable long-term goals. SAM helps you refine these goals based on the portion of the market you can realistically serve, while SOM helps you establish short-term targets based on your current capabilities.

Identify opportunities for growth

In the process of evaluating your TAM SAM SOM, you may discover new business opportunities and pivots for your idea. For example, a business may identify an unoccupied gap in its SAM and that can be captured with just minimal additions to its product. All in all, engaging in the TAM SAM SOM research and calculations helps you focus on the market demands and see the opportunities for growth more clearly.

Improve your go-to-market strategy

Once you've done the research necessary for TAM SAM SOM, it's easy to use these insights to enhance your go-to-market strategy. These metrics should guide key decisions, for example, TAM informs your overall market potential, SAM identifies the most viable segments to target, and SOM ensures you focus on attainable market shares.

Moreover, the TAM SAM SOM evaluation can be a starting point for your competitor analysis that helps shape product and marketing strategies. By understanding the size and characteristics of your target market, you can better assess your competition and identify opportunities to differentiate your product.

Allocate resources efficiently

Understanding your TAM SAM SOM enables strategic resource allocation. You can focus your efforts on the areas where they can yield the highest returns while avoiding unnecessary spending in less promising markets.

For instance, a company could choose to intensify marketing and sales efforts to enhance brand awareness and market penetration within its SAM. Proactively making these decisions facilitates effective brand management from the outset.

Attract investors

Clearly defined TAM, SAM, and SOM metrics can boost investor confidence. They demonstrate that you have a deep understanding of your market and a realistic plan for capturing it, which is crucial for securing funding.

Investors seriously consider TAM SAM SOM looking for a balanced TAM, a realistic SAM, and a high SOM that promises a lot of potential.

As your business grows, revisiting TAM, SAM, and SOM helps identify new opportunities for expansion. You can evaluate new markets, adjust your strategy, and set new goals based on evolving market conditions.

How to Calculate TAM SAM SOM?

There are typically two approaches to calculating TAM and SAM, which depend on how you gather your data. The first method involves using publicly available research conducted by industry analysts such as IDC or Gartner, known as the top-down approach. The market data from open sources helps you evaluate TAM, which in turn you can use to calculate SAM and SOM.

Alternatively, you can conduct your own research or hire a research agency, which is known as the bottom-up approach. With this method, you are using your own business data and market research data to evaluate TAM SAM SOM.

There is another way to determine TAM SAM SOM that can be utilized for innovative products that don't really have an established market niche yet. It's called Value Theory Approach. Imagine we are at the end of 2000s and are trying to determine TAM for Facebook. Having no analogues or even an established market for this type of product, we could try using a Value Theory Approach and research how much people would be willing to pay for the value your product provides.

The calculation mirrors the bottom-up approach, but instead of averaging sale prices, you assess the price of a comparable product and the premium your superior product could command. While these calculations are inherently subjective and less precise than typical TAM, they still enable you to evaluate the entire market for your product.

SOM, on the other hand, is usually calculated after your company has entered the market and uses your own operational data. Therefore, the approaches mentioned above are rarely relevant for its calculation.

Useful resources for TAM SAM SOM calculation include industry report and market research data, financial reports from publicly traded companies in your industry, industry consultants, and market research software such as social listening and online monitoring tools.

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

TAM (Total Addressable Market) Calculation

When calculating TAM, a top-down calculation entails analyzing industry data, market reports and research studies on the size of markets and subsections and aligning that data with your own business objectives. That way you can get a sense of your TAM.

However, the data found in these reports might be too broad, describing a similar but not the same market, or simply outdated.

If your company has substantial resources, you can hire a firm to conduct new research or assign an internal team to this task, employing a bottom-up approach to TAM. Of course, few startups are ready to spend their limited resources on research so the top-down approach is more relevant for them.

TAM Formula

Whatever the source of your data is, the formula for TAM calculation is the same.

The number of customers comes from market research, while annual revenue is typically determined based on your own company data. If you don't have this data yet, it can also be sourced from industry evaluations.

TAM calculation example

Let's say we want to calculate TAM for a software directed at financial institutions that's meant to streamline their KYC processes. Hypothetically, there are 25,000 financial institutions that can benefit from such a solution, and they spend $5 000 on KYC a year. Our TAM will equal 25,000 X $5 000 = $125 mln. This represents the total potential revenue if your software were adopted by every financial institution worldwide.

SAM (Serviceable Addressable Market) Calculation 

When calculating SAM, you refine your analysis to get a realistic estimate of how much of your product you can sell.

Continuing with our earlier example, suppose your KYC product has features that make it more relevant to credit unions rather than banks. While a percentage of private banks might still purchase the solution, the SAM calculation would be based on the number of credit unions on the market.

SAM Formula

SAM calculation example

According to Statista, there are 4,760 credit unions in the USA that roughly translates to 7.5% of all financial institutions. So, let's figure out SAM for our KYC software: $125 mln X 7.5% = $9,375,000

SOM (Serviceable Obtainable Market) Calculation

SOM is usually calculated for businesses that are already in the market and have paying customers. To calculate it, you need to multiply your last year's market share by this year's SAM.

The market share depends on your existing competition. For example, let's say there are 5 major vendors of KYC software for financial institutions, 4 of them offer special features for credit unions. Last year you sold $500,000 worth of KYC software. Your market share equals your last year's revenue divided by SAM i.e. $500,000/$9,375,000=0,05 or 5% of the entire market.

If your final revenue for the year turns out to be more than your SOM, it means you've successfully conquered some of your competitors’ market share. And the opposite, if your revenue is lower than SOM, it means your competitors are gaining upper hand and is a sign to revise your product and go-to-market strategy.

If you predict that your market share might grow in the upcoming year due to your strategy, you may calculate the approximate SOM based on the market share you want to capture.

For the companies that haven't entered the market yet, you can try calculating SOM using a Value Theory Approach. This will require rigorous research into consumer trends and behavior to determine what your realistic revenue could look like. You can also utilize the sales forecasting features of your CRM software to try determining your future revenue.

SOM Formula

SOM Examples

The SAM for our KYC software was $9,375,000. Let's multiply it by the market share we found above, i.e. $9,375,000*0.05=$468,750

Maximizing Business Growth with TAM, SAM, and SOM Analysis

TAM, SAM, and SOM can be leveraged to grow your business in various ways, such as exploring new markets, convincing investors of your business plan, and tailoring your marketing and sales strategies. Here's a list of common TAM SAM SOM use cases:

• Identifying growth opportunities: TAM, SAM, and SOM can help you pinpoint new opportunities for growth within your existing market or in new markets.
• Validating product ideas: These metrics provide a clear understanding of market size and potential revenue, helping you validate your business idea.
• Developing a go-to-market strategy: By identifying the most attractive market opportunities and ideal customers, TAM SAM SOM assist in crafting effective go-to-market strategies.
• Attracting investors: Investors consider TAM, SAM, and SOM when evaluating potential investments. A large and growing market opportunity indicated by these metrics can attract investor interest.
• Measuring your progress: Use TAM, SAM, and SOM to measure your success in expanding within existing markets or entering new ones.

Calculate TAM SAM SOM for Strategic Growth

All in all, TAM, SAM, and SOM serve different purposes in assessing market potential. SOM indicates short-term sales potential, SAM denotes the target market share, and TAM represents the potential at scale. These numbers are often used to validate your business idea and convince stakeholders such as investors or the company board to support it.

You can calculate TAM SAM SOM by sourcing publicly available data or conducting your own in-depth market research. The calculations can help you discover new opportunities on the market and refine your go-to-market strategy.

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