Calculating the Total Addressable Market is essential for marketers to determine the maximum revenue opportunity for a product or service. 

If a product can attain 100% market share, this figure represents the revenue opportunity that can be realized. As such, this calculation allows companies to determine the scale and range relevant to their market opportunity and decide on strategic implications. It helps evaluate investments and focuses on developing products, marketing strategies, and resource allocation, among other things. 

It differs from the Serviceable Available Market (SAM), which refers to the portion of the TAM targeted by a company’s products and services based on geographical, regulatory, and operational constraints. Furthermore, the Serviceable Obtainable Market (SOM) narrows it to the segment that a company can realistically capture, considering factors like competition and market reach. 

Read this blog to find the major differences between TAM, SAM, and SOM and learn how to calculate each metric.

What is TAM (Total Addressable Market)?

Total Addressable Market (TAM) refers to the overall revenue opportunity available for a product or service if it achieves 100% market share in a specific industry or segment. It represents the total demand for a product or service in a given market, providing a clear picture of the potential market size and guiding strategic business decisions related to market entry, investment, and growth potential.

How Do You Calculate TAM (Total Addressable Market)?

Calculating the Total Addressable Market (TAM) involves a few different methods depending on the availability of data and the specificity of the market. 

Here are the three primary approaches to calculate TAM:

Top-Down Approach

This method starts with a broad market size figure and narrows it down to your target market segment.

• Identify a Reliable Source: Obtain market size data from industry reports, research firms, or government publications.
• Segment the Market: Determine what portion of the broad market is relevant to your product or service.
• Adjust for Your Target Market: Apply percentage estimates to account for your target audience's specific needs, demographics, or behaviors.
• Example: If the global footwear market is valued at $200 billion and athletic shoes makeup 30% of the total, the TAM for athletic shoes would be $60 billion.

Bottom-Up Approach

This method involves building up the market size by calculating the potential sales at the micro level and scaling it up.

• Identify Your Market Segments: Determine all the different segments your product or service could serve.
• Calculate the Unit Economics: Estimate the average selling price (ASP) and the number of potential customers or units sold per segment.
• Scale Up: Multiply the number of potential customers or units the ASP sells and sum these values across all segments.
• Example: If you sell a software subscription for $100 per year and there are 1 million businesses in your target market, your TAM would be $100 million yearly.

Value Theory Approach

This method estimates the value of your product or service by considering the economic value it provides to customers.

• Determine the Economic Benefit: Estimate the cost savings or revenue gains your product provides to a customer.
• Estimate the Willingness to Pay: Determine how much of the economic benefit customers are willing to pay for your product.
• Scale Across the Market: Multiply the value by the number of potential customers in your market.

Example: If your software saves a company $10,000 annually and companies are willing to pay $5,000 for it, and there are 10,000 potential companies, your TAM would be $50 million.

What is the Service Available Market (SAM)?

Serviceable Available Market, also known as SAM, refers to the percentage of the Total Addressable Market or TAM available to a company through its products and service offerings, which are determined by geography and operation. 

SAM represents the segment of the market that a company can realistically target and serve with its current offerings and resources, excluding areas where it does not operate or has no competitive presence. This measure provides a more focused view of the potential revenue opportunity by filtering out market segments the company needs to address due to various constraints.

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How Do You Calculate the Service Available Market (SAM)?

Calculating the Service Available Market (SAM) involves narrowing down the Total Addressable Market (TAM) to the portion of the market that your company can realistically target and serve. 

Here’s a step-by-step guide on how to calculate SAM:

Identify the Total Addressable Market (TAM)

• Define the Broad Market: Determine the overall revenue opportunity if your product or service achieves 100% market share.
• Source Data: Use industry reports, market research firms, or other reliable sources to find the TAM.

Segment the Market

• Define Market Segments: Break down the TAM into different segments based on criteria such as geography, customer demographics, product lines, and industry sectors.
• Select Relevant Segments: Identify the segments that align with your company’s capabilities, product offerings, and strategic goals.

Evaluate Geographical Reach

• Define Geographic Boundaries: Determine the geographical regions where your company operates or plans to operate.
• Adjust for Regional Differences: Consider local market conditions, customer preferences, and regulatory constraints that might impact your ability to serve specific regions.

Consider Operational Constraints

• Assess Resources and Capabilities: Evaluate your company’s production capacity, distribution network, sales force, and marketing reach.
• Identify Service Limitations: Exclude market segments your company cannot serve due to resource limitations or operational challenges.

Calculate SAM

• Apply Segmentation Criteria: Narrow down the TAM by applying the relevant segmentation filters (geography, demographics, product lines, etc.).
• Sum the Relevant Segments: Add up the market sizes of the selected segments to arrive at the SAM.

What is SOM (Service Obtainable Market)?

The Service Obtainable Market (SOM) refers to the portion of the Serviceable Available Market (SAM) that a company can realistically capture within a specific time frame, considering factors such as competition, market conditions, and the company's resources and capabilities. 

SOM provides a more accurate and practical estimate of market potential by considering the company's ability to reach and serve customers effectively, making it a critical metric for strategic planning and resource allocation.

How to Calculate SOM (Service Obtainable Market)

Calculating the Service Obtainable Market (SOM) involves several steps that help narrow down from the broader market estimates to what your company can realistically capture. 

Here’s a step-by-step guide on how to calculate SOM:

Identify the Total Addressable Market (TAM)

• Define the Broad Market: Determine the overall revenue opportunity available if your product or service achieves 100% market share.
• Source Data: Use industry reports, market research firms, or other reliable sources to find the TAM.

Determine the Serviceable Available Market (SAM)

• Segment the Market: Narrow down the TAM to the portion your product or service can address, considering geographical, regulatory, and operational constraints.
• Refine the Market Size: Calculate the SAM by applying the relevant filters to the TAM.

Analyze Market Conditions and Competition

• Assess Competition: Identify and evaluate your competitors, understanding their market share and strategies.
• Evaluate Market Conditions: Consider factors like market growth rate, customer preferences, and economic conditions that could impact your ability to capture the market.

Assess Your Company’s Capabilities

• Resource Evaluation: Consider your company’s resources, including financial, human, and technological capabilities.
• Market Penetration Strategy: Define your marketing and sales strategies and assess how effectively you can reach your target customers.

Estimate Your Market Share

• Historical Data and Benchmarks: Use your company’s historical performance and industry benchmarks to estimate potential market share.
• Target Customer Analysis: Analyze the number of customers you can reach within a specific time frame.

Calculate SOM

• Apply Market Share Estimate to SAM: Multiply the SAM by the estimated market share percentage that your company can realistically capture.

Example Calculation

TAM: The total addressable market for your product is $1 billion.

SAM: After narrowing down by relevant filters, your serviceable available market is $200 million.

Estimate Market Share: Based on competition and your capabilities, you estimate that you can capture 10% of the SAM.

SOM Calculation: SOM = SAM * Market Share Percentage

SOM = $200 million * 10%

SOM = $20 million

How To Use TAM, SAM, and SOM For Your Business

Step 1: Define Your Product or Service

Begin by clearly outlining your product or service, including its unique selling points (USPs). Understand your target customers and the specific problems your product or service solves.

Step 2: Calculate TAM (Total Addressable Market)

Identify the broadest possible market for your product or service without considering any constraints. Use industry reports, market research studies, and statistical data to estimate the overall market size. This can be measured in revenue, units sold, or customer count.

Step 3: Calculate SAM (Serviceable Available Market)

Segment the TAM into specific segments that align with your product or service's capabilities and geographic reach. Given your current business model, distribution channels, and geographic limitations, determine which segments you can target. For example, if your SAAS product is only available in North America, your SAM would be all small businesses in North America.

Step 4: Calculate SOM (Serviceable Obtainable Market)

To evaluate the competitive landscape, both the competition and position in a market need to be analyzed. Regarding competition, the percentage of SAM you can capture is conditioned by the market penetration rate in a given market segment. For example, if you estimate that no company will have more than 5% of the North American small business market for your joint data mining service, your SAM will equal 100%. Thus, your SOM will also be 5% of the North American small business market.

Step 5: Validate Your Assumptions

Conduct market research through surveys, focus groups, and interviews with potential customers to validate your assumptions. Use pilot programs or beta testing to gather customer interest and adoption rate data.

Step 6: Use TAM, SAM, and SOM for Strategic Planning

Use your SOM to set realistic sales targets and revenue goals. Develop marketing strategies tailored to the characteristics and needs of your SAM. Allocate resources effectively by prioritizing markets and segments with the highest potential based on your SOM.

Step 7: Monitor and Adjust

Continuously monitor market trends, customer feedback, and the competitive landscape. Adjust your TAM, SAM, and SOM calculations as your business grows and market conditions change.

Example

For example, if your TAM includes all global small businesses, amounting to 100 million businesses, and your SAM includes small businesses in North America, totaling 20 million businesses, with an estimated market share of 5% in North America, your SOM would be 1 million businesses. Following these steps, you can use TAM, SAM, and SOM to guide your business strategy, make informed decisions, and allocate resources to maximize market potential.

What Is the Importance of TAM, SAM, and SOM for a Business?

TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market) are critical for a business as they provide a structured approach to understanding and assessing market opportunities. 

Here’s why these metrics are important:

Market Sizing and Opportunity Assessment

• TAM helps businesses understand the full market potential for their product or service without any constraints, providing a big-picture view of the opportunity.
• SAM narrows this down to the market portion that a business can realistically target with its current products and services, factoring in geographic, regulatory, and operational constraints.
• SOM further refines this to the portion of the SAM that a business can feasibly capture, considering competition, market share, and operational capabilities.

Strategic Planning and Goal Setting

• These metrics enable businesses to set realistic and achievable goals. Companies can set informed revenue targets and growth objectives by understanding the size of the obtainable market (SOM).
• They also aid in prioritizing markets and segments to focus on, ensuring that resources are allocated to areas with the highest potential returns.

Resource Allocation

• Knowing the TAM, SAM, and SOM allows businesses to allocate resources more effectively. This includes budget allocation for marketing, sales, product development, and other operational aspects.
• It helps determine the necessary investment in technology, personnel, and infrastructure for market penetration.

Competitive Analysis

• Businesses can better understand the competitive landscape by defining the SAM and SOM. This includes identifying direct and indirect competitors, analyzing their market share, and understanding their strengths and weaknesses.
• This analysis informs strategic decisions regarding product positioning, pricing strategies, and differentiation.

Investor Communication and Fundraising

• These metrics are crucial for communicating market potential to investors and stakeholders. They provide a clear and quantifiable view of the market opportunity, helping to justify investment and support funding rounds.
• Investors use TAM, SAM, and SOM to assess a business's scalability and potential return on investment.

Product Development and Innovation

• Understanding these market segments helps identify unmet needs and gaps in the market, guiding product development and innovation efforts.
• Businesses can tailor their offerings to meet the needs of their target market better, ensuring higher adoption and satisfaction rates.

Risk Management

• By clearly understanding the obtainable market (SOM), businesses can better assess and manage market entry, expansion, and competition risks.
• It allows for more accurate forecasting and planning, reducing the likelihood of overestimating market size and underperforming.

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Final Words

Understanding TAM, SAM, and SOM is crucial for businesses to identify their market potential and strategically plan their growth. 

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TAM provides a broad view of the total market opportunity, highlighting the full revenue potential if a company captures the entire market. SAM refines this by focusing on the market segment that aligns with the company's products or services, giving a more targeted view of achievable revenue. SOM further narrows this down to the realistic portion of the market the company can capture, considering competition and market strategies.

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