TAM vs. SAM vs. SOM explained for founders

What is TAM?

Total Addressable Market (TAM) represents the total revenue you could generate if you captured 100% of the market for a specific product or service. It is the largest possible market for your business, considering every potential customer without any restrictions like demographics, competition, or product specifics. 

While TAM provides a theoretical maximum, no company can capture 100% of the market in practice.

What is an addressable market?

An addressable market refers to the total number of potential customers for your business. It helps businesses measure the total available opportunity in the market, showing how large the revenue potential is.

Why does TAM matter?

TAM is important because it shows you your business's maximum potential. It helps you understand how big the market opportunity is and gives you a sense of the scale your business can reach. For entrepreneurs and investors, TAM is also key in determining the attractiveness of a market and whether it’s worth pursuing.

How to calculate TAM (top-down approach)

The top-down approach uses industry data and market reports to estimate your TAM. These reports provide insights into the overall size of industries or market segments. Aligning industry data with your business plan helps you estimate your potential market size.

This method is effective when you have access to reliable industry reports. However, the data might not always closely align with your product or market specifics.

How to calculate TAM (bottom-up approach)

The bottom-up approach involves starting with your product or service and building up from there. You calculate TAM by taking the total number of potential customers in your market and multiplying it by the average revenue per customer. 

For example, if you sell software with a yearly subscription of $500 and 1,000 potential customers, your TAM would be $500,000. This method uses more concrete data, such as sales or pricing, providing a more precise and actionable estimate of TAM.

How to calculate TAM (value theory approach)

The value theory approach focuses on your product's value to customers and how much they would be willing to pay. This method is useful when you're launching a highly innovative product where no clear market data exists.

Instead of average sales price, estimate your product’s value based on competitor pricing and unique features.

For example, if your product offers additional benefits compared to competitors, your TAM would include the higher price customers might be willing to pay for those benefits.

What is SAM?

Serviceable Addressable Market (SAM) refers to the portion of the TAM that your product/service can realistically serve. Unlike TAM, which assumes your business can reach every potential customer, SAM considers your specific resources, target audience, and product limitations.

It also helps you narrow down the market to what you can actually target and serve, making it a more practical and achievable number.

Why does SAM matter?

As a founder, understanding your SAM is important because it can help define your target market strategy. Focusing on the market portion you can serve may enhance resource allocation and can help increase potential for success.

SAM also guides marketing and sales efforts by helping you identify segments with high potential. For example, targeting tech-savvy small businesses could yield a higher ROI than a broad audience.

It’s also crucial for investors to get a clearer view of your business’s medium-term potential.

How to calculate SAM

An effective way to calculate SAM is by continuing the bottom-up approach used to calculate TAM. Here are some steps to calculate SAM:

1. Identify target segments: Break down the TAM into smaller, more specific market segments relevant to your product.
2. Eliminate irrelevant segments: Remove market segments your product or service cannot effectively serve. 
3. Estimate customer value: Determine the average revenue you expect to generate from each customer in the target segment (usually by looking at Annual Contract Value (ACV) or a similar metric).
4. Multiply: Multiply the total number of potential customers in your target segment by the expected annual value per customer.

For example, if you target 3,000 customers in a specific region, and each customer is expected to generate $1,300 annually, your SAM would be $3,900,000.

SAM vs. TAM

Here's a quick comparison between SAM and TAM to help you get some more clarity:

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What is SOM?

Serviceable Obtainable Market (SOM) refers to the market portion your business can realistically capture with its current resources, capabilities, and strategy. Unlike TAM or SAM, which are theoretical or broad, SOM quantifies what you can actually achieve right now. It considers factors like competition, market conditions, and your company's operational capacity.

Why is SOM important?

SOM helps you understand the market share you can target and capture in the short term. It is important because it shows how much of the market you can realistically serve with your current business model. This metric also helps in:

• Setting realistic goals and growth expectations.
• Creating focused marketing and operational strategies.
• Identifying areas for improvement or expansion within your market.
• Comparing your position against competitors and understanding your share of the market.

How to calculate SOM

To calculate your SOM, start with your SAM. You can then estimate the portion of SAM that your organization can realistically serve based on your product, strategy, and resources.

Here's the formula to calculate SOM:

SOM = (Total number of potential customers) × (% of customers you can serve) × (% of market you can capture) × (Average annual revenue per customer)

SOM vs. SAM

While SAM is the portion of the market you can target with your product or service, SOM is the actual market share you can realistically capture.

• SAM represents the broader market opportunity according to your product’s reach and relevance.
• SOM is a more practical measure, showing what you can actually capture given your current resources, competition, and market strategy.

TAM vs. SAM vs. SOM

Understanding the differences between TAM, SAM, and SOM is important when planning your business strategy. Here’s a quick breakdown:

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Basically, TAM gives you an idea of the full market potential, SAM helps you understand the specific market you can serve, and SOM shows what you can actually capture based on your resources.

Together, these metrics help provide a structured view of your market potential, from theoretical maximum to realistic capture.

How do investors use TAM vs. SAM vs. SOM?

Investors pay close attention to TAM, SAM, and SOM to assess the potential of your business idea and its growth prospects. Here’s how they use each metric:

• TAM helps investors evaluate the overall opportunity. A large TAM suggests there's significant room for growth and a bigger return on investment.
• SAM shows investors the targetable portion of the market that aligns with your capabilities. A well-defined SAM means your business is not chasing an overly broad market.
• SOM gives investors insight into what you can realistically capture. This shows how your business will perform in the real market, making your projections more reliable.

TAM, SAM, SOM example

Calculating TAM, SAM, and SOM gives you a clearer understanding of your market opportunity, leading more informed decisions. 

Let’s see how these metrics apply to a real-world scenario: 

TAM example 

Let’s say you plan to launch a mobile app that helps people track their fitness. To calculate TAM:

• Potential customers: You estimate that there are 50 million people interested in fitness tracking apps.
• Average revenue per customer: $20 per year (subscription fee).

Your TAM calculation will be:

TAM = 50,000,000 × $20
TAM = $1,000,000,000

So, the TAM for your fitness tracking app is $1 billion. This figure gives you a rough idea of the total potential revenue in the market, though it may change based on competition and market shifts.

This calculation assumes every potential customer subscribes to your service.

SAM example

Next, you want to calculate the SAM for your fitness app, focusing on users in the U.S. By narrowing your focus to U.S. users, you can better align your resources with high-priority markets.

• Potential customers: Out of the 50 million, 30% of them live in the U.S.
• Average revenue per customer: $20 per year.

Your SAM calculation will be:

SAM = 50,000,000 × 0.3 × $20
SAM = $300,000,000

So, the SAM for your fitness app in the U.S. market is $300 million. This helps you target a specific portion of the market you can realistically serve.

SOM example

Finally, you calculate the SOM, which represents the share of the SAM that you can realistically capture in the first year.

• Target customers: You estimate that you can capture 5% of the U.S. market.
• Average revenue per customer: $20 per year.

Your SOM calculation will be:

SOM = 50,000,000 × 0.3 × 0.05 × $20
SOM = $30,000,000

Although 5% might seem small, the SOM for your fitness app in the U.S. market for the first year is $30 million—a strong starting point for growing a business. This helps you set realistic sales objectives and focus your marketing efforts on reaching the target customers.

Benefits of TAM, SAM, SOM analyses

These metrics help you make informed decisions by showing the potential market size, identifying target audiences, and assessing how much market share you can realistically capture. Here’s how TAM, SAM, and SOM can benefit your business:

Estimate commercial viability

TAM helps you assess whether your business idea has commercial potential. Calculating how much money can be generated if everyone in your target market buys your product lets you identify enough opportunities to make a good profit margin. If the TAM is too small, it might not justify the investment.

Understand the potential market

Using SAM, you narrow down the total market to the portion you can actually target based on factors like location, pricing, and customer needs. This gives you a realistic view of your reach, helping you focus on the market that fits your offering. It also guarantees that your resources are spent on the right opportunities.

Benchmark business performance

Once you’ve calculated your SOM, you can compare it against actual performance. SOM represents the portion of the SAM you can capture. Tracking your SOM helps you measure progress and see if your business is on track to meet its goals. If you consistently fall short of your SOM target, you can identify and fix issues like poor lead generation or ineffective marketing.

Determine untapped opportunities

You can spot gaps in the market by analyzing TAM, SAM, and SOM. For example, you might find that a certain segment of your SAM is not being served well, or you may realize there are new regions or customer groups you haven’t considered. These gaps can help refine your marketing strategies or even guide new product development.

Deduce viable market value

These market metrics help you estimate the value of your market more realistically. Knowing your SAM and SOM allows you to make data-backed decisions on pricing, investment, and growth strategies. It also helps you avoid overshooting your goals and makes sure that your targets align with what is realistically achievable.

FAQs about TAM vs. SAM vs. SOM

What is the difference between SAM and TAM?

The Total Available Market (TAM) represents the full potential market for a product/service, assuming no limits in reach or competition. It’s the broadest measure of market size. On the other hand, the Serviceable Available Market (SAM) is a subset of TAM. It focuses on the market segment your business can realistically target according to your resources, business model, and geographic reach.

What is the difference between total available market and total addressable market?

TAM (Total Available Market) and TAM (Total Addressable Market) refer to the same concept. Both describe the entire market for a product or service without considering restrictions or competition.

What is a good TAM for a VC-backed startup?

A strong TAM for a VC-backed startup generally falls between $10 million and $300 million. This size is typically large enough to show significant growth potential but not so vast that it’s unmanageable or overly saturated.

Which is the best way to do your TAM calculation?

There are three main approaches to calculate TAM:

1. Top-down: Uses industry reports and data to estimate TAM. It’s based on research from sources like Gartner or Forrester.
2. Bottom-up: Based on existing sales data. Multiply your average sale price with the number of customers to estimate TAM.
3. Value-theory: Estimates TAM by assessing the value consumers place on your product and the amount they’d be willing to pay.

Can TAM and SAM be the same?

No, TAM is the total market opportunity, while SAM is the portion of TAM that your business can realistically serve. SAM focuses on your target market, considering your resources and market constraints.

Wrap up

By understanding TAM, SAM, and SOM, you can focus your efforts where they matter most, driving growth and maximizing ROI. Calculating and tracking these metrics allows you to make informed decisions, prioritize your efforts, and set achievable growth targets. 

If you’re looking to scale your business with streamlined spending and smart financial planning, Rho can help you out. Our platform provides easy access to corporate checking, treasury, and enterprise-level spend management.

Our automated systems for accounts payable, corporate cards, and cost tracking allow you to focus on growth while properly managing cash flow. Book a call with a Rho expert today!

Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

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