How to Find Your TAM, SAM, and SOM
Understanding your market size is crucial when establishing your business. Knowing your market can help you:
✔ Secure funding: Investors want to see that you’ve thought critically about your market potential.
✔ Guide your business strategy: Understanding your market size helps you set achievable growth goals.
✔ Reduce risk: Knowing your SOM prevents you from overestimating revenue projections and making costly mistakes.
Investors and business strategists often use three key metrics—TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market)—to assess growth potential and market opportunity.
If these terms sound intimidating, don’t worry! In this article, we’ll break them down and give you tips so that you can calculate each one for your business.
Definitions
TAM (Total Addressable Market): This is the entire market demand for your product or service. It represents the total revenue opportunity if your business were to capture 100% of the market—which, realistically, is nearly impossible.
SAM (Serviceable Available Market): This is the portion of the TAM that you can realistically serve based on your business model, geographical limitations, industry focus, and target audience.
SOM (Serviceable Obtainable Market): This is the realistic market share you can capture in the short term, considering your competition, marketing budget, and business capacity.
Calculations
1. Calculate Your TAM (Total Addressable Market)
To find your TAM, ask: If everyone in the world who could use my product bought it, how big would the market be?
There are two common methods to estimate TAM:
Top-Down Approach: Use industry research, reports, and market studies to determine the total market size. Sources like Statista, IBISWorld, Gartner, and McKinsey provide industry estimates.
Bottom-Up Approach: Multiply the number of potential customers by the average revenue per customer.
Formula: \text{TAM} = \text{Total # of Customers} \times \text{Annual Revenue per Customer}
Example: If there are 10 million potential customers and the average annual revenue per customer is $500, your TAM is $5 billion.
2. Determine Your SAM (Serviceable Available Market)
Your SAM represents the realistic portion of the TAM that your business can serve based on your niche and target audience.
Refine Your Market Scope: Consider geographic limitations, industry-specific needs, and customer segments you can effectively reach.
Filter Based on Business Model: If your business serves only a segment of the TAM, adjust accordingly.
Example: Let’s say your company only operates in North America, and the total market size in this region is $1 billion. That means your SAM is $1 billion, not the full $5 billion TAM.
3. Identify Your SOM (Serviceable Obtainable Market)
SOM is your actual achievable market share based on competition, budget, and operational constraints.
Look at Competitor Market Share: If dominant competitors already control a large portion of the market, you may only be able to capture a small fraction.
Assess Your Business Capacity: Consider your salesforce, marketing reach, and funding.
Use Industry Benchmarks: Research average market share for new entrants in your industry.
Example: If you estimate that you can realistically capture 5% of your SAM in your first few years, and your SAM is $1 billion, then:
SOM=5%×1 billion=50 million\text{SOM} = 5\% \times 1\text{ billion} = 50\text{ million}SOM=5%×1 billion=50 million
So, your SOM is $50 million—a much more realistic target for investors and internal planning.
