A thorough analysis of Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) is essential for understanding the market size and growth potential of your product or service, as well as for designing an effective go-to-market strategy. The concepts are also often central to pitch decks, and a thorough market calculation shows investors that you understand your market and have a realistic growth plan.
Briefly explained, what are TAM, SAM and SOM?
- Total Addressable Market (TAM): The total revenue opportunity for a product or service if 100% market share is achieved without competition (usually purely hypothetical).
- Serviceable Available Market (SAM): The portion of the TAM that can be served by your company's products or services, considering your business model and strategy.
- Serviceable Obtainable Market (SOM): The share of SAM that the company can realistically achieve in the short term, based on current resources and competitive situation.
How do you calculate TAM, SAM and SOM?
Total Addressable Market (TAM): The total market opportunity
Many people use a top-down approach to calculating TAM, analyzing industry data, market reports, and research studies to estimate the total market size. This can provide some insight, but if you want to convince a professional investor, a bottom-up calculation is often better.
A bottom-up approach is based on having a specific or intended pricing. Using this method, you multiply the number of potential customers by the average annual contract value or purchase price. This not only provides a more original and accurate assessment of market potential than a top-down approach, but using a bottom-up approach in your pitch deck shows you and the investor that you have a deeper understanding of the market.
Let's take an example : You sell agricultural software for 10,000 NOK per year. There are 37,267 agricultural companies ( 2024 ) in Norway. If you multiply these, you get a TAM of 372.6 million NOK. If you have aspirations to sell internationally in the long term, you must include global or relevant markets in your TAM – but this only makes sense if you actually have international ambitions. Counting all the world's agricultural companies will only give an inaccurate picture if your focus is only Norway.
If, however, you dream of building Norway's next unicorn , you need to think bigger. Venture capitalists rarely look at companies with a TAM of less than $1 billion – so if you want to attract these investors, you need to make sure your market potential is big enough to be interesting. You can also usefully demonstrate how TAM can increase over time through product development or market expansion.
If you are in the very early stages or working on a highly innovative product, and do not yet have products for sale, it can be challenging to do a bottom-up calculation of TAM. In such cases, you can instead analyze the price of comparable products and consider what premium your hopefully superior solution can offer. Focus on the value your product will provide to customers, conduct qualitative and quantitative research and estimate what the customer would realistically be willing to pay.
TAM gives you an idea of the maximum market opportunity, but it is unrealistic to reach the entire market. Therefore, you need to narrow it down into market segments, demonstrated by SAM.
Serviceable Available Market (SAM): Which market segments are relevant to you?
SAM provides a more realistic picture of the market that can actually be served by your products or services. To calculate SAM, you need to identify the most relevant market segments and estimate the size of each segment.
Following the previous example, and adding that your software is specifically designed for dairy farmers, we can narrow down the market. In Norway, there were 6,499 dairy farms in 2023 ( source ), and if you sell your software for 10,000 NOK per year per farm, your SAM would be 64.9 million.
Serviceable Obtainable Market (SOM): What market share can you realistically achieve in the short term?
SOM represents the share of SAM that the company can realistically achieve in the short term. For example, in an investor presentation, you might present SOM as the market share your company can capture if you secure the desired financing and execute your strategy as planned.
Let's assume that your company sold software worth 1 million NOK last year to dairy farmers. With a SAM of 64.9 million NOK, you have a market share of about 1.5%. If SAM increases to 80 million NOK next year, you can expect a SOM of about 1.2 million NOK. This is based on the expected growth rate in your segment. An even more precise calculation of SOM can be made by also considering factors such as competition, company capacity, and plans for developing new products and services in the short term.
It's easier to calculate SOM if you have a solid business model and realistic data from actual sales. But even if you haven't sold anything yet, you can still make a qualified estimate by identifying your easiest first customer.
For example, if you are based in Ås and are developing a solution for dairy farmers, you could start by mapping how many dairy farmers over a certain size are in Follo, and then expand your analysis to Akershus. This first segment, known as your “beachhead market,” is the part of the market where you have the greatest likelihood of rapid adoption and can build early growth.
Using this approach, you can make a realistic assessment of how much of the SAM you can actually capture in the short term, even before you have concrete sales figures.
Masterclass in Go-to-market strategy: Who and where is your first customer?
If you are interested in learning more about Go-to-market strategy and calculating market potential, you can sign up for ESSE masterclass led by BI and eSmart Systems 19.06 here .
Photo by Owen Cannon on Unsplash
Related articles