{"id":2890,"date":"2022-09-07T13:40:00","date_gmt":"2022-09-07T13:40:00","guid":{"rendered":"http:\/\/138.197.200.24\/resources\/?post_type=blog&p=2890"},"modified":"2026-08-06T10:22:56","modified_gmt":"2026-08-06T10:22:56","slug":"tam-sam-som","status":"publish","type":"blog","link":"https:\/\/www.smartkarrot.com\/resources\/blog\/tam-sam-som\/","title":{"rendered":"TAM SAM SOM: The Art of Calculating Market Size for Your Business"},"content":{"rendered":"

Starting a new company comes with a lot of energy and enthusiasm. You may have also envisioned its success in the market and earning huge profits from it. For this vision to come true, you must have a fair idea of the market you are operating in \u2013 you will have to know the size of the market and the share you have in it.<\/p>\n

When you know your market size and share, you can set a realistic revenue goal and forecast your profit potential.<\/p>\n

If you are yet to find them, this guide will be of immense help. The guide discusses TAM, SAM, and SOM in detail \u2013 the three key metrics to calculate your market size and share.<\/p>\n

Let us get started.<\/p>\n

TAM SAM SOM<\/h2>\n

These acronyms sound quite interesting, aren\u2019t they? They stand for \u2013<\/p>\n

    \n
  1. TAM \u2013 Total Addressable Market<\/li>\n
  2. SAM \u2013 Serviceable Available Market<\/li>\n
  3. SOM \u2013 Serviceable Obtainable Market<\/li>\n<\/ol>\n

    The three metrics give you the necessary inputs about the market that you are operating in. They furnish the necessary details associated with the businesses\u2019 market size and accessibility. This is also a key reason why these metrics serve as the key components of both \u2013 a business plan and an investor\u2019s pitch. They are also important when drafting your marketing and sales strategies.<\/p>\n

    Let us now discuss each of the metrics in detail<\/p>\n

    TAM \u2013 Total Addressable Market<\/h3>\n

    TAM \u2013 the Total Addressable Market \u2013 the broadest metric of the three \u2013 refers to the maximum market demand for your product\/ service. Taking a broader view, TAM gives you the figure of the maximum revenue you could generate in the market of operation.<\/p>\n

    The Total Addressable Market is extremely useful for businesses, especially B2B start-ups, as it provides insights into the market\u2019s potential for growth. A critical point to remember is that TAM calculations do not consider constraints such as geographic boundaries, competition, marketing budgets, etc.<\/p>\n

    Importance of TAM<\/h4>\n

    The TAM is the very first market calculation in a business case and is also an especially important piece of information when identifying new business opportunities. Venturing into a new business without knowing the number of people interested in your offering is baseless. At the same time, lacking the knowledge will make it extremely difficult to validate the revenue and growth assumptions.<\/p>\n

    SAM \u2013 Serviceable Available Market<\/h3>\n

    While the Total Addressable Market (TAM) calculation paints quite a rosy picture of opportunity, it is important to understand that it is not likely for you to capture the entire market. For instance, you might have to share your market share with the competition, or your target audience might prefer an alternative product. Therefore, you should be considering SAM to narrow the market.<\/p>\n

    The Serviceable Available Market<\/a> is the market segmentation metric that answers an important question \u201cwhat part of your TAM is the most appropriate for you?\u201d By taking factors such as geographical reach, production capacity, and diversification, SAM provides a fair, realistic estimate of the potential customers for your product or service. SAM provides you with the market percent that you should be addressing based on your business model.<\/p>\n

    Importance of SAM<\/h4>\n

    SAM, a subset of TAM, eliminates irrelevant market segments your company will not be able to serve. As these segments are eliminated, the target market becomes narrow. At the same time, it also serves as a good reminder for evaluating factors such as competition, culture, resources, etc., impacting the business.<\/p>\n

    As SAM makes the target segment more precise, it also helps in enhancing the efficiency of the activities of your marketing & sales teams. Additionally, investors emphasize SAM as it highlights the business\u2019 growth and success prospects in the market.<\/p>\n

    SOM \u2013 Serviceable Obtainable Market<\/h3>\n

    The Serviceable Obtainable Market (SOM) is yet another important part of the market segmentation analysis. SOM, also known as the Share of Market, is the subset of SAM and gives the most realistic estimate of the market share that the business can capture in the immediate future. The metric gives a short-term estimate, i.e., 3 to 5 years.<\/p>\n

    Importance of SOM<\/h4>\n

    Serviceable Obtainable Market is a particularly important measure for organizations trying to establish their financial projections. SOM calculations also serve handy when making decisions related to the operations of the firm.<\/p>\n

    For instance, it makes it possible for businesses to create sales projections based on the potential market share that they may have. At the same time, SOM also helps businesses compare themselves with their competitors to analyze their position in the market. This could be useful when drafting strategies to position and set the business offering apart from competing products.<\/p>\n

    A Serviceable Obtainable Market is also helpful for identifying future growth possibilities and even the gaps in the market. It can also help come up with distinctive strategies the company could use to advertise its product and\/or to create and launch new products. This aids investors in doing a more thorough analysis of each possibility.<\/p>\n

    How to Use TAM, SAM, and SOM <\/h2>\n

    Using TAM, SAM, and SOM involves a step-by-step process to analyze the market potential and make strategic decisions. Here\u2019s how you can use these metrics effectively: <\/p>\n

      \n
    1. Define your product\/service and target market:<\/strong> Clearly define the product or service you offer and identify the specific market segment you intend to target. The more precise your definition, the more accurate your analysis will be. <\/li>\n<\/ol>\n
        \n
      1. Calculate TAM (Total Addressable Market):<\/strong> Estimate the total market demand for your product or service. This can be done through market research, industry reports, and data analysis. Consider factors such as the total population of potential customers, their needs, and the total revenue generated by similar products\/services in the market. <\/li>\n<\/ol>\n
          \n
        1. Calculate SAM (Serviceable Available Market):<\/strong> Identify the portion of the TAM that your company can realistically target and serve. SAM is determined by considering factors such as geographical reach, distribution channels, and the capabilities of your business to meet customer needs<\/a>. <\/li>\n<\/ol>\n
            \n
          1. Calculate SOM (Serviceable Obtainable Market):<\/strong> SOM is the realistic market share you can achieve within a specific timeframe. This involves researching and analyzing your competition, understanding your unique selling points, and estimating how much of the SAM you can capture with your marketing and sales efforts. <\/li>\n<\/ol>\n
              \n
            1. Set realistic business goals:<\/strong> Use the TAM, SAM, and SOM figures to set specific, measurable, achievable, relevant, and time-bound (SMART) business goals. These goals should align with your company\u2019s growth objectives and reflect the market opportunities you have identified. <\/li>\n<\/ol>\n
                \n
              1. Develop marketing and sales strategies:<\/strong> Based on the TAM, SAM, and SOM analysis, create targeted marketing and sales strategies. Tailor your messaging and promotions to reach the identified market segments effectively. Allocate resources wisely, focusing on areas where you can make the most impact. <\/li>\n<\/ol>\n
                  \n
                1. Monitor and adjust:<\/strong> Regularly monitor your progress in capturing the SOM and be prepared to adjust your strategies as needed. Stay updated on market changes, customer preferences, and competitive landscape to remain agile in your approach. <\/li>\n<\/ol>\n
                    \n
                  1. Reassess periodically:<\/strong> Market conditions change over time, so it\u2019s essential to reassess TAM, SAM, and SOM periodically. As your business grows or new opportunities arise, these metrics may shift, and you\u2019ll need to adapt your strategies accordingly. <\/li>\n<\/ol>\n
                      \n
                    1. Use for investment and funding decisions:<\/strong> TAM, SAM, and SOM are crucial when seeking investment or funding. Potential investors will evaluate your understanding of the market and the potential for your business to scale. Presenting well-researched and realistic TAM, SAM, and SOM figures can enhance your credibility and attract investors. <\/li>\n<\/ol>\n

                      By using TAM, SAM, and SOM effectively, businesses can make informed decisions, focus their efforts on viable market opportunities, and increase their chances of success in their chosen markets. These metrics provide a solid foundation for strategic planning, resource allocation, and overall business growth. <\/p>\n

                      Calculating TAM, SAM, SOM<\/h2>\n

                      As we have already discussed, calculating TAM, SAM, and SOM helps understand the market size and share. This makes it especially important for companies, especially start-ups, to know these values concerning their ventures. The quick formulas for calculating TAM, SAM, and SOM make this task easy.<\/p>\n

                      Let us discuss these calculations<\/p>\n

                      Calculating TAM<\/h3>\n

                      To calculate the TAM for your offering, it is advised that you start with a bottom-up analysis of the industry. Once this is done, multiply the total potential customers with the average annual revenue per customer<\/a>.<\/p>\n

                      Here is the formula \u2013<\/p>\n

                      Total number of accounts in the market * Annual contract value<\/p>\n

                      The total number of accounts in the market can be gained through market research.<\/p>\n

                      Annual contract value can be derived from the company\u2019s customer data.<\/p>\n

                      Calculating SAM<\/h3>\n

                      To calculate SAM, you should list out the TAM from a specific target market. The next step is to multiply the number by the average annual revenue generated by each customer.<\/p>\n

                      Here is the formula \u2013<\/p>\n

                      TAM from specific target market * Annual contract value<\/p>\n

                      Calculating SOM<\/h3>\n

                      To calculate SOM, you will have to divide your previous year\u2019s SAM and multiply it by this year\u2019s SAM.<\/p>\n

                      Here is the formula \u2013<\/p>\n

                      Previous year\u2019s Market Share * The current year\u2019s SAM<\/p>\n

                      Examples of TAM, SAM, and SOM<\/h2>\n

                      Take the case of a start-up operating in the cloud services industry. To calculate the TAM of this company, start by counting the total number of businesses paying for cloud services (in the world). Imagine that there are 50 million businesses.<\/p>\n

                      The next step is to find the average spending\/customer in the market. If that is found to be about $2,000\/year.<\/p>\n

                      Now, you will have to multiply the two numbers to get your TAM, i.e., (50 million * $2,000)<\/p>\n

                      To calculate the SAM, let us narrow down the target market \u2013 let us say that the start-up specializes in providing cloud services to companies in the Finance industry.<\/p>\n

                      So now, you will have to identify the number of potential customers in this particular target segment. Say the number is 20 million of the 50 million counted for the TAM.<\/p>\n

                      Now, let us consider that the average annual spend\/customer is $3000\/year for 20 million businesses.<\/p>\n

                      Then the SAM = 20 million * $3000<\/p>\n

                      Now, to calculate the SOM, you will have to list out the previous year\u2019s sales of your start-up. Let us assume that the start-up generated $30 million in sales during the previous year. The next step will be to multiply it by the SAM of the current year.<\/p>\n