TAM, SAM, and SOM: A Guide to De-risk Your Startup for Investors
Business Process Management
Learn how to use TAM, SAM, and SOM in your market analyses, and use these more detailed and specific figures to demonstrate to prospective investors that you’ve got a realistic hold on your market’s potential.
When it comes to presenting your potential market value to prospective investors, finding the right balance is tricky.
On the one hand, you want to demonstrate as much upside potential as possible. On the other, you know that investors are weary of overzealous founders and that you may be better off putting forward more conservative figures.
The ideal way to find the equilibrium is to analyze and present market potential at three levels by using TAM, SAM, and SOM. These three degrees of market analysis progressively zoom in to delineate current potential from total growth potential.
Learn how to calculate TAM, SAM, and SOM in your own market analyses. Then you can use these more detailed and specific figures to demonstrate to prospective investors that you’ve got a realistic hold on your market’s potential.
What are TAM, SAM, and SOM?
TAM, SAM, and SOM are metrics representing different market subsets. Each is important for its own reasons, but all are extremely useful for evaluating a business idea’s potential.
- TAM (Total Addressable Market)- provides a panoramic view of the whole market’s profitability
- SAM (Serviceable Available Market)- gives a snapshot of the market segment you might realistically capture with your business
- SOM (Serviceable Obtainable Market) - zooms in on your company’s immediate market focus, short-term plan, and initial offerings
Together they provide a complete view that can help you shape your enterprise’s business plan and maximize your potential for success.
Why use TAM, SAM, and SOM?
Understanding and calculating TAM, SAM, and SOM can help you understand how profitable and realistic your entrepreneurial endeavors are to help provide prospective investors with evidence of potential revenue.
Most founders start and stop at TAM. But disregarding SAM and SOM can lead to devastating marketing miscalculations presenting a less mature and sophisticated market view to potential investors.
Additionally, these figures can help create a sustainable business plan and model.
Say, for example, based on your market research and business plan, you assess that:
- TAM = $4BN
- SAM = $200M
- SOM = $10M within 2 years and $24M within 4 years
- EBITDA margin = 25%
- Exit valuation = 8x EBITDA based on the value of listed companies within the sector
Here, you have a detailed understanding of market potential. While the total market might hold $4BN worth of potential inside, you can more realistically obtain $24M in the next 4 years and use these figures to fuel growth initiatives for the upcoming years.
In short, taking the time to calculate TAM, SAM, and SOM—whether using a bottom-up or top-down approach (which we’ll explain below)—leads to a deep understanding of your market, ideal avatar, pricing strategy, competition, and other crucial factors for success.
Total addressable market (TAM) overview
TAM refers to your total addressable market, sometimes called the total available market.
TAM paints a picture of the whole industry’s maximum market potential. Say, for example, you’re starting a pet food company. Your TAM would be the average each pet owner spends on pet food sales annually, multiplied by the total number of pet owners worldwide.
The total addressable market is a hypothetical value because it’s doubtful that one company will fulfill 100 percent of the total market demand and have unlimited resources to do so.
How to calculate TAM
This information is key for you as well as potential investors. It allows you to assess your market’s upside potential.
Essentially, TAM is a bottom-up analysis, providing a big-picture view of your whole industry so you can strategically map your business’s trajectory with SAM and SOM. It’s considered a bottom-up analysis because you determine the local market size and then extrapolate upwards to a wider segment.
At its most basic level, TAM is the total annual sales expected within a given market.
The most straightforward formula for calculating TAM is:
average annual customer revenue * total number of potential customers in the entire target market
Note: When calculating TAM, it’s vital to define your industry clearly. For instance, Uber is so much more than a taxi service. And I think we can all agree that Amazon is much more than an online bookseller. They’re good examples of companies serving the convenience industry. Failing to define your industry accurately is a serious mistake that can lead to detrimental miscalculations in your market analysis.
Serviceable available market (SAM) overview
SAM stands for serviceable addressable market or serviceable available market. Realistically, you probably won’t have a monopoly in your industry. You probably also can’t market to 100 percent of your TAM due to practical limitations around logistics, geography, competitors, and other factors.
SAM allows businesses to estimate how much of the market they might capture with their current business model.
Let’s go back to the pet food example. Your pet food company operates out of South Florida and does not sell online. Research shows that most pet owners in South Florida have dogs, so you determine that your target market is South Florida dog owners. Your SAM would be the average each South Florida dog owner spends on dog food sales annually, multiplied by the total number of South Florida dog owners.
Naturally, the available market you can service (SAM) will be much smaller than the total available market (TAM). SAM helps you get a closer look at your market segments to target them accordingly.
SAM lets you determine your niche markets by distinguishing customer segments based on demographics, such as age, gender, geography, income levels, technology, and more. Then, you can see where to obtain the share of your revenue in the short- and medium-term.
Note: The SAM acronym also refers to software asset management, another important part of your business, but it’s unrelated to serviceable available market.
How to calculate SAM
Your business model will have limitations (resources, geography, competition, etc.) that prevent you from targeting the whole market. SAM considers those limitations so you can hone in on your target market and increase your chances of successful marketing.
The SAM formula is as follows:
all potential customers in my target market * average annual revenue from each customer
Notice that TAM’s formula focuses on the entire industry, while SAM’s calculations revolve around your target market.
Serviceable obtainable market (SOM) overview
SOM stands for serviceable obtainable market, also known as “share of market”.
It narrows down your SAM even more, giving you a picture of what section of the market you could realistically capture in the short term.
Let’s revisit your pet store. Market research finds that most dog owners in South Florida purchase dog food within ten miles of their homes. You also learn that most dog owners within ten miles of your shop are baby boomers. Based on this valuable information, you decide to target baby boomer dog owners living within ten miles of your current location.
In a way, SOM is the most important metric of the three because if the market size is too small, the investment isn’t worthwhile, or you won’t be able to realize the idea. And as a result, its purpose is to hone in on current and short-term resources, business models, and competition.
Note: SOM can also refer to SaaS operations management, another important part of your business but unrelated to serviceable obtainable market.
How to calculate SOM
Investors want to make sure you have realistic short-term goals because realizing your goals will be crucial for growth and further investments. Knowing your SOM can help you formulate a marketing plan to execute these short-term goals and target your specific market. This strategic planning means de-risking investments early on.
The SOM formula is:
(last year’s revenue / last year’s SAM) * this year’s SAM
First, find last year’s market share by dividing last year’s revenue by last year’s SAM. Then multiply last year’s market share by this year’s SAM.
If your business is brand new, you’ll need to perform a competitive analysis to estimate your SOM. Analyze the last year’s revenue and SAM of South Florida neighborhood dog food companies with similar business models and demographics.
An example of TAM, SAM, and SOM
Calculating your TAM, SAM, and SOM values is a systemic narrowing in on your ideal customer.
Let’s say your company is a CRM platform.
You’ve performed market research, analyzed the number of companies that can take advantage of a CRM tool, and assessed the total addressable market to be $80B.
However, your platform is a mobile-only tool designed to support reps in the field who need a CRM that works natively on a mobile device such as an iPad. Your serviceable available market for a mobile-only SaaS is $25B, per your calculations.
Now consider your go-to-market plan, which details that your ICP (ideal company profile) requires customers to have at least 30 seats. That means you’ll only target businesses with at least 30 field sales reps.
In this example, your figures are:
- TAM: $80B
- SAM: $25B
- SOM: $3B
Let Vendr help your venture succeed
Calculating your business’s TAM, SAM, and SOM takes time and other valuable resources. However, these efforts can save you time and money in the long run, attract investors, and multiply your revenue.
The more you research and build up your historical data over time, the more accurate your TAM, SAM, and SOM estimations will be. This lets you plan more strategically, improving your ability to reach your target audience.
For nearly all organizations, getting in front of your audience means leveraging a stack of software tools like CRM, marketing automation, and social media advertising platforms.
Vendr is the SaaS buying platform that helps procurement teams streamline the software purchasing process, maintain and improve supplier performance, and maximize vendor value through improved contract negotiations.