TAM, SAM and SOM: How to Size Your Market
TAM, SAM and SOM are three nested estimates of market size. TAM is the total demand for your type of product, SAM is the part your business model and reach can serve, and SOM is the share you can realistically win in the next few years.
By Javier Alonso, Founder & CEO. Updated .
Formulas
- TAM
- Total potential customers × annual value per customer
- SAM
- Customers you can serve (segment, region, channel) × annual value per customer
- SOM
- SAM × realistic market share in 3 to 5 years
TAM: total addressable market
TAM is the total revenue available if every possible customer bought your type of product. It describes the size of the opportunity, not what you will earn. Investors use it to check that the market could support a large company if you succeed.
SAM: serviceable available market
SAM is the part of TAM you can actually serve with your product, business model and reach. It excludes segments your product does not fit, regions you cannot sell into and channels you cannot use.
SOM: serviceable obtainable market
SOM is the share of SAM you can realistically capture in the next three to five years, given competitors, your sales capacity and your go-to-market plan. It is the number that should match your revenue forecast.
Top-down vs bottom-up
A top-down estimate starts with a big industry figure from a report and takes a percentage: "The software market is worth hundreds of billions, and we only need 1%." Investors distrust this because it says nothing about how you will win customers.
A bottom-up estimate starts with countable customers and a real price: how many companies of your ICP type exist, multiplied by what each would pay per year. It is more work, but it is believable and it connects directly to your ideal customer profile and pricing.
Worked example
A startup sells scheduling software to physiotherapy clinics at $1,200 per clinic per year.
- TAM: there are roughly 100,000 clinics in the countries where the product could ever be sold. 100,000 × $1,200 = $120 million a year.
- SAM: the product only works in English and integrates with two booking systems, which covers about 25,000 clinics. 25,000 × $1,200 = $30 million.
- SOM: with a small sales team, winning 4% of SAM in four years is ambitious but defensible. 1,000 clinics × $1,200 = $1.2 million a year.
The numbers here are illustrative. Use counts from industry associations, government business registers or your own research, and show the source for each.
Common mistakes
- Quoting a huge TAM from an unrelated industry report.
- Assuming a percentage of the market without explaining how you will win it.
- A SOM that does not match the revenue in your financial model.
- Counting customers who could never pay your price.
For your role
- Founders
- Put the method on the slide, not just the three circles. Showing your working builds trust.
- Investors
- A bottom-up SOM that matches the founder's go-to-market plan says more about their understanding than a large TAM.
- Accelerators & incubators
- Market sizing is a good teaching exercise: it forces teams to count their real customers and confirm their price.
Primary sources
- Market Research and Competitive Analysis — U.S. Small Business Administration
- Writing a Business Plan — Sequoia Capital
Common questions
- What is the difference between TAM, SAM and SOM?
- TAM is the total demand for your type of product, SAM is the part you can serve with your model and reach, and SOM is the share you can realistically win in the next few years.
- How do you calculate TAM?
- Bottom-up: multiply the number of potential customers by the annual value each would pay. Top-down estimates from industry reports are less convincing.
- What SOM do investors expect?
- One that is realistic and consistent with your revenue forecast and go-to-market plan. A small, well-argued SOM is more credible than a large, unexplained one.
Put it into practice
Pitch Deck Analyzer reviews your deck, including how clearly the market is explained.