TAM, SAM and SOM explained, with a worked example
One of these numbers is a dream, one is a plan and one is next year. Here is how to work out all three, with the math shown.
What are TAM, SAM and SOM?
They are three sizes of the same market. TAM, total addressable market, is the revenue if every possible customer bought from you. SAM, serviceable addressable market, is the part of that you could actually serve with your product, price and reach. SOM, serviceable obtainable market, is the part you can realistically win in the next year or two. TAM is the dream, SAM is the strategy and SOM is the forecast.
How do you calculate TAM?
Multiply the number of possible customers by what one customer pays you in a year. Count customers who have the problem and could pay for a fix, not everyone in the industry. TAM = possible customers × annual revenue per customer.
How do you calculate SAM?
Start from TAM and remove every customer you cannot serve today: the wrong country, language, size, platform or price range. SAM = customers you can actually serve × annual revenue per customer.
How do you calculate SOM?
Work from your channels, not from a percentage. Count how many of your SAM customers you can reach through the ways you actually sell, such as a list, a partner, ads or door knocking, and how many of those you can realistically convert and serve in a year. SOM = customers you can win this year × annual revenue per customer.
What is a TAM, SAM and SOM example?
Take a hypothetical staff-scheduling app for independent cafes at $600 a year. The numbers below are made up to show the method.
- TAM: say there are 30,000 independent cafes in the country. 30,000 × $600 = $18 million a year.
- SAM: the app only works with two point-of-sale systems, used by 9,000 of those cafes. 9,000 × $600 = $5.4 million a year.
- SOM: your newsletter reaches 4,000 cafe owners, and a partner can introduce you to 2,000 more. If 5% of those 6,000 sign up in year one, that is 300 cafes. 300 × $600 = $180,000 a year.
$180,000 is far less exciting than $18 million, and far more useful. It is a number you can plan hiring and spending around, and defend line by line.
Should you use top-down or bottom-up market sizing?
Bottom-up, whenever you can. Top-down takes a big industry figure from a report and claims a percentage of it, which says nothing about whether you can win a single customer. Bottom-up starts from a real unit, price times reachable customers, so it is smaller and much harder to argue with. Use a top-down figure only as a sense check on your TAM.
What mistakes do founders make with TAM, SAM and SOM?
- Quoting only TAM. 'It is a $50 billion market' tells nobody whether you can capture any of it.
- Claiming 1% of a huge market. A percentage with no channel behind it is a guess dressed as a plan.
- Counting people who do not have the problem, or cannot pay for a fix.
- A SOM bigger than your channels can deliver. If you can reach 6,000 people, you cannot win 20,000 customers.
- Never updating it. Your real sign-ups after three months are the best SOM evidence you will ever have.
How does market size fit into judging a business idea?
Market size is the T in the MOAT framework (Margin, Operations, Advantage, TAM), and it is the score founders inflate most. Size the obtainable market honestly first. The MOAT Evaluator on BizWax.Ai scores all four parts with a panel of AI models and pushes back on an unrealistic market, and the Target Market Assessor narrows 'everyone' down to the customers you can actually reach.
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