Total addressable market (TAM), serviceable addressable market (SAM), and serviceable obtainable market (SOM) are market sizing figures that estimate how much revenue a business could earn from its market. TAM is the full revenue opportunity for a product or service. SAM is the portion of TAM that a company can serve, and SOM is the portion of SAM that it can realistically capture in its first few years.

Founders usually calculate these figures before pitching venture capitalists. However, market sizing is also used to help businesses determine which customers to pursue first, how to price their product, and how many salespeople to hire.

Below, we'll explain TAM, SAM, and SOM, how to calculate each, why they matter to investors, and how to avoid common mistakes.

Key takeaways

• TAM, SAM, and SOM estimate a market at three levels: the total revenue opportunity for a product, portion of the market a company can serve with its business model and reach, and market share it can realistically capture in the near term.

• Each figure can be calculated top-down from industry reports or bottom-up from customer counts and pricing. Bottom-up estimates tend to be more credible to investors because each assumption can be checked.

• Investors use market sizing to judge whether a startup can grow large enough to produce the returns they need and whether the founder understands the market.

• Common mistakes with market sizing include defining the market too broadly, confusing TAM with SAM, and presenting a SOM that isn't connected to a launch plan.

What are TAM, SAM, and SOM?

TAM, SAM, and SOM are market sizing metrics that estimate the revenue opportunity for a product or service at three levels: the entire market, portion of it a company can serve, and portion it can realistically capture. Each figure is a subset of the one before it, so TAM is always the largest number, while SOM is the smallest.

TAM is usually expressed as annual revenue. SAM and SOM are part of that figure and typically a standard component of market analysis in business plans and pitch decks. You might also see TAM written as "total available market" and SAM written as "serviceable available market".

Each metric is defined by the customers it includes. TAM counts every potential buyer of a product, SAM counts the buyers a company can serve, and SOM counts the buyers it can expect to win in the near term.

Total addressable market (TAM)

TAM is the total annual revenue a product or service would generate if it captured 100% of its market. It assumes that every potential customer buys and that there's no competition, so TAM is an upper limit, not a forecast.

The definition of the market determines the number. For a startup that sells payroll software to restaurants, the TAM is what restaurants spend on payroll software, not what all businesses spend on software.

Serviceable addressable market (SAM)

SAM is the portion of TAM that a company can reach with its current business model, geography, and distribution channels. SAM leaves out customers the company can't serve today. For example, a customer may fall outside of SAM because they're located where the company doesn't operate, they aren't in the segment the product is built for, the product's price or sales model doesn't fit them, or the company has no channel to reach them. As the company adds products, languages, or regions, SAM grows.

Serviceable obtainable market (SOM)

SOM is the share of SAM that a company can realistically capture in the near term. It accounts for competition and for the company's own resources, including sales capacity and marketing budget.

SOM is the figure most closely connected to a revenue target. It reflects your go-to-market (GTM) strategy: how many customers your team can reach, how many will buy, and how quickly.

How do you calculate TAM, SAM, and SOM?

You can calculate TAM, SAM, and SOM in two ways: a top-down estimate that starts with industry data and narrows it, or a bottom-up estimate that multiplies the number of target customers by the revenue each generates.

Top-down calculation approach

A top-down estimate starts with a published figure for a whole market, such as an industry report or analyst forecast, and applies percentages to narrow it.

Top-down estimates are fast to produce and useful for checking whether a market is large enough to investigate. Their weakness is that a report's category is often broader than the product you sell, and the percentages can be difficult to justify.

Bottom-up calculation approach

A bottom-up estimate builds the figure from your own inputs: how many customers fit your target profile and how much each one pays per year. The basic formulas are:

TAM = Total Number of Potential Customers × Annual Revenue per Customer
SAM = Number of Potential Customers You Can Serve × Annual Revenue per Customer
SOM = Number of Customers You Can Realistically Win × Annual Revenue per Customer

Here's where each input typically originates:

• Customer counts: Government business statistics, industry associations, and your own market research can show how many businesses or people fit your target profile. The US Small Business Administration (SBA) lists public data sources for US markets.

• Annual revenue per customer: Use your actual price or annual contract value (ACV), a software-as-a-service (SaaS) metric that measures the average revenue per customer per year. Results from paying customers are stronger evidence than a planned price.

• Customers you can win: Base SOM on capacity. Estimate how many deals your salespeople can close in a year, or divide your marketing budget by your customer acquisition cost (CAC), which is the cost of converting a prospect into a paying customer.

Bottom-up estimates tend to be more credible to investors because each assumption can be checked. Y Combinator's Michael Seibel has written that he prefers the bottom-up method because it helps founders avoid defining the customer too broadly. The venture capital (VC) firm Andreessen Horowitz has made a similar case: a bottom-up analysis requires a founder to consider the target customer, what that customer will pay, and how the product will be sold.

Why do investors care about market sizing?

Investors care about market sizing because it shows whether a startup can grow large enough to produce the returns they need and whether the founder understands the market. That's why TAM, SAM, and SOM appear in so many pitch decks. Investors generally read the figures for three things:

• Size of the opportunity: VC firms expect most of their investments to fail or return little, so they rely on a few large successes to produce most of a fund's returns. That leads them to look for markets large enough that capturing a portion could build a large company.

• Quality of a founder's research: A market size built on clear, sourced assumptions shows that you know who your customers are and what they'll pay. An inflated or unsupported number can quickly reduce a pitch's credibility with experienced investors.

• Feasibility of the plan: SOM connects the market to your sales capacity, budget, and timeline. Investors can compare it with your revenue projections.

Expectations vary by investor type and funding stage. A market that's too small for a VC fund can still support a profitable company, and founders who are pitching angel investors or bootstrapping often work with smaller markets.

What are common market sizing mistakes founders make?

The most common market sizing mistakes are inflating TAM, confusing TAM with SAM, and presenting figures that aren't connected to a GTM plan. These can make the opportunity look larger or more certain than the evidence supports.

Here's what to avoid when market sizing:

• Defining the category too broadly: Using the size of a whole industry, such as global healthcare spending, for a product that serves one narrow need inflates TAM. Define the market by the specific problem your product solves and the customers who have that problem.

• Assuming a small share of a large market: Stating that you need only 1% of a multibillion-dollar market doesn't explain how you'll win those customers. Investors generally want to see how you'll reach customers, not a percentage.

• Confusing TAM with SAM: Presenting the total market as if the company could serve all of it ignores the limits of your geography, pricing, and distribution. Show both figures and explain the factors that distinguish them.

• Using assumptions you can't support: Prices no customer has paid, outdated reports, and customer counts without a source weaken the whole estimate. Note the source of each input.

• Presenting a SOM without a plan behind it: A SOM that doesn't match your sales capacity, marketing budget, or hiring plan may appear speculative. Tie SOM to the number of customers your team can acquire and to your market positioning against competitors.

What is an example of TAM, SAM, and SOM?

An example of TAM, SAM, and SOM is a startup that narrows its market from every possible customer worldwide to the customers it can win in its first year. Let's say a founder is starting a SaaS company that sells appointment scheduling software to veterinary clinics for US$3,000 per year. All figures below are illustrative.

TAM: Every clinic that could use the product

The founder finds an industry report estimating that veterinary clinics worldwide spend US$1.5 billion per year on software. That figure includes medical records, payments, and other tools the startup doesn't sell. Instead, the founder estimates that 100,000 clinics worldwide could use scheduling software. At US$3,000 per clinic per year, the TAM is US$300 million.

SAM: The clinics the startup could serve

The product is available only in English, the startup can support customers only in the US and Canada, and the software is designed for independent clinics. The founder estimates that 20,000 clinics fit those criteria, which makes the SAM US$60 million.

SOM: The clinics the startup can win in year one

The startup has two salespeople, and the founder expects each to win an average of five new clinics per month. That's 120 new customers in the first year and a year-one SOM of US$360,000 in annual contract value, or 0.6% of SAM.

That's a small share, but the founder can defend it because it follows directly from sales capacity. It also shows investors how the business could grow: more salespeople increase SOM, new countries increase SAM, and new products expand TAM.

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