TAM, SAM, and SOM

What Are TAM, SAM, and SOM?

Think of these metrics as three concentric circles, each getting smaller and more focused:

TAM (Total Addressable Market)

• The entire possible market for your product
• Everyone who could theoretically use your product
• Your “dream big” number

SAM (Serviceable Addressable Market)

• The portion of TAM you can actually reach
• People who would realistically use your product
• Limited by your business model and geography

SOM (Serviceable Obtainable Market)

• The portion of SAM you can realistically capture
• Your actual target in the near term
• Limited by your resources and competition

Real-World Example: Food Delivery App

Let’s break it down using a food delivery app example:

TAM Calculation

All people who order food for delivery worldwide
Global food delivery market: $150 billion

SAM Calculation

People who order food delivery in your country
Limited to urban areas where you can operate
Example: $10 billion in your country’s urban areas

SOM Calculation

Realistic market share you can capture
Limited by competition, resources, and strategy
Example: $100 million in your target cities

Why These Numbers Matter

1. Business Planning
   • Help set realistic goals
   • Guide resource allocation
   • Inform investment decisions
2. Investor Communication
   • Show market opportunity
   • Demonstrate realistic thinking
   • Support funding requests
3. Strategy Development
   • Identify target markets
   • Plan expansion phases
   • Set growth targets

How to Calculate Each Metric

1. TAM Calculation Methods

Top-Down Approach

Start with industry size and narrow down:

TAM = Total Industry Value × Relevant Percentage

Example:

• Global software market: $500 billion
• Enterprise software segment: 20%
• TAM = $500B × 20% = $100B

Bottom-Up Approach

Start with price per unit and multiply by potential customers:

TAM = Total Potential Customers × Average Annual Revenue per Customer

Example:

• Potential customers: 1 million
• Average annual spend: $1,000
• TAM = 1M × $1,000 = $1B

2. SAM Calculation

Start with TAM and apply real-world limitations:

SAM = TAM × (Reachable Percentage)

Example:

• TAM: $1 billion
• Reachable market (your country): 10%
• SAM = $1B × 10% = $100M

3. SOM Calculation

Consider your actual capabilities and competition:

SOM = SAM × (Achievable Market Share)

Example:

• SAM: $100 million
• Realistic market share: 5%
• SOM = $100M × 5% = $5M

Industry Examples

• SaaS Company:
  • TAM: All businesses that could use software
  • SAM: Businesses in your target segments
  • SOM: Realistic first-year customer base
• Electric Car Manufacturer:
  • TAM: All car buyers worldwide
  • SAM: Car buyers in markets you serve
  • SOM: Expected sales based on capacity
• Online Education Platform:
  • TAM: All students globally
  • SAM: Students in your language/regions
  • SOM: Expected students year one

Common Mistakes to Avoid

1. Overestimating TAM
   • Bad: Including everyone who could theoretically use your product
   • Good: Including only relevant potential customers
2. Unrealistic SAM
   • Bad: Ignoring geographical and practical limitations
   • Good: Considering real-world constraints
3. Optimistic SOM
   • Bad: Assuming high market share without justification
   • Good: Using conservative, achievable estimates

Practical Application Tips

1. Data Sources

• Industry reports
• Market research
• Government statistics
• Competitor analysis
• Customer surveys

2. Validation Methods

• Expert interviews
• Customer feedback
• Market testing
• Competitor analysis
• Industry benchmarks

3. Regular Updates

• Review annually
• Adjust for market changes
• Update with new data
• Refine assumptions