An Entrepreneur’s Guide to TAM, SAM, and SOM: De-risk Your Startup for Investors

Employees are leaving the workplace in unprecedented numbers, a phenomenon now coined “The Great Resignation.” According to the U.S. Bureau of Labor Statistics, 2.9% of the American workforce had quit their jobs as of October 12th, 2021.

All those talented individuals aren’t sitting idly by. The number of new businesses being established exploded since the pandemic began—Americans started more new businesses in 2020 than any of the preceding 15 years, according to the New York Times.

While it’s exciting to see people adapting to the times and reaching for their dreams, the cold reality is that many of them will fail to build sustainable companies.

According to the Bureau of Labor Statistics, as reported by Fundera:

  • 20% of small businesses don’t make it past their first year.
  • That number becomes 30% in the second year.
  • 50% of small businesses fail after five years.
  • 70% of small businesses don’t make it past the 10th year.

These statistics are discouraging, but you can improve your company’s chance of success by knowing your business’s total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). These methods to understand your market can help you strategically plan your company’s future.

What are TAM, SAM, and SOM?

TAM, SAM, and SOM are metrics representing different market subsets. Each one is important for its own reasons, but all are extremely useful for evaluating a business idea’s potential.

TAM provides a panoramic view of the whole market’s profitability. SAM gives a snapshot of the market segment you might realistically capture with your business. SOM zooms in on your company’s immediate market focus, short-term plan, and initial offerings.

Together they provide a complete view that can help you shape your enterprise’s business plan and maximize your potential for success.

Why use TAM SAM SOM?

How can TAM, SAM, and SOM maximize your business potential? Understanding and calculating TAM SAM SOM can help you understand how profitable and realistic your entrepreneurial endeavors are.

Furthermore, you can provide prospective investors with evidence of potential revenue. They want a target return that implies de-risking their investment early. They also want opportunities with considerable upside potential.

Additionally, these figures can help you create a sustainable business plan and model.

Haphazard guesses at TAM and disregarding SAM and SOM can lead to devastating marketing miscalculations.

For example, based on your market research and business plan, we assess that:

  • TAM = $4BN
  • SAM = $200M
  • SOM = $10M within two years and $24M within four years
  • EBITDA margin = 25%
  • Exit valuation = 8x EBITDA based on the value of listed companies within the sector

While these numbers might look alien to you right now, the short of it is you can use these calculations to make decisions about your business. Should you expand your market? Should you take on investors? And let’s say you pitch an investor. What is their target return, and when can they see the return?

In short, taking the time to calculate TAM, SAM, and SOM—whether using a bottom-up or top-down approach (which we’ll explain below)—leads to a deep understanding of your market, ideal avatar, pricing strategy, competition, and other crucial factors for success.

Total addressable market (TAM) overview

TAM refers to your total addressable market, also sometimes called the total available market.

TAM paints a picture of the whole industry’s maximum market potential. Say, for example, you’re starting a pet food company: your TAM would be the average each pet owner spends on pet food sales annually, multiplied by the total number of pet owners worldwide.

The total addressable market is a hypothetical value because it’s doubtful that one company will fulfill 100% of the total market demand and have unlimited resources to do so.

How to calculate TAM

This information is key for you as well as potential investors. It allows you to assess your market’s upside potential.

Essentially, TAM is a bottom-up analysis, providing a big-picture view of your whole industry so you can strategically map your business’s trajectory with SAM and SOM. It’s considered a bottom-up analysis because you determine the local market size and then extrapolate upwards to a wider segment.

At its most basic level, TAM is the total annual sales that can be expected within a given market.

The most straightforward formula for calculating TAM is:

average annual customer revenue * total number of potential customers in the entire target market

Note: When calculating TAM, it’s vital to define your industry clearly. For instance, Uber is so much more than a taxi service. And I think we can all agree that Amazon is much more than an online bookseller. They’re good examples of companies serving the convenience industry. Failing to define your industry accurately is a serious mistake that can lead to detrimental miscalculations in your market analysis.

Serviceable available market (SAM) overview

SAM stands for serviceable addressable market or serviceable available market. Realistically, you probably won’t have a monopoly in your industry. You probably also can’t market to 100 percent of your TAM due to practical limitations around logistics, geography, competitors, and other factors.

SAM allows businesses to estimate how much of the market they might capture with their current business model.

Let’s go back to the pet food example. Your pet food company operates out of South Florida and does not sell online. Your research shows that most pet owners in South Florida have dogs. You determine that your target market is South Florida dog owners. Your SAM would be the average each South Florida dog owner spends on dog food sales annually, multiplied by the total number of South Florida dog owners.

Naturally, the available market you can service (SAM) will be much smaller than the total available market (TAM). SAM helps you get a closer look at your market segments so you can target them accordingly.

SAM lets you determine your niche markets by distinguishing your customer segments based on demographics, such as age, gender, geography, income levels, technology, and more. Then, you can see where you can obtain the share of your revenue in the short- and medium-term.

Note: The SAM acronym also refers to software asset management, another important part of your business but unrelated to serviceable available market.

How to calculate SAM

Your business model will have limitations (resources, geography, competition, etc.) that prevent you from targeting the whole market. SAM considers those limitations so you can hone in on your target market, so you can increase your chances of successful marketing.

The SAM formula is as follows:

all potential customers in my target market * average annual revenue from each customer

Notice that TAM’s formula focuses on the entire industry while SAM’s calculations revolve around your target market.

Serviceable obtainable market (SOM) overview

SOM stands for serviceable obtainable market, also known as “share of market.”

It narrows down your SAM even more, giving you a picture of what section of the market you could realistically capture in the short term.

Let’s revisit your pet store. Your market research finds that most dog owners in South Florida purchase dog food within a ten-mile radius of their homes. You also learn that most of the dog owners within ten miles of your shop are baby boomers. Based on this valuable information, you decide to target baby boomer dog owners living within ten miles of your current location.

In a way, SOM is the most important metric of the three because if the market size is too small, the investment isn’t worthwhile, or you won’t be able to realize the idea. And as a result, it’s purpose is to hone in on current and short-term resources, business models, and competition.

Note: SOM can also refer to SaaS operations management, another important part of your business but unrelated to serviceable obtainable market.

How to calculate SOM

Investors want to make sure you have realistic short-term goals because realizing your goals will be crucial for growth and further investments. Knowing your SOM can help you formulate a marketing plan to execute these short-term goals and target your specific market. This strategic planning means de-risking investments early on.

The SOM formula is:

(last year’s revenue / last year’s SAM) * this year’s SAM

First, you find last year’s market share by dividing last year’s revenue by last year’s SAM. Then you multiply last year’s market share by this year’s SAM.

If your business is brand new, you’ll need to perform a competitive analysis to estimate your SOM. You’ll need to analyze the last year’s revenue and SAM of South Florida neighborhood dog food companies with similar business models and demographics.

Let Blissfully help your venture succeed

Calculating your business’s TAM, SAM, and SOM upfront takes time and other valuable resources. However, these efforts can save you time and money in the long run, attract investors, and multiply your revenue.

The more you research and build up your historical data over time, the more accurate your TAM, SAM, and SOM estimations will be. This lets you plan more strategically, maximizing the chances your company will be a success.

Performing market analyses like TAM SAM SOM is just one task that busy business owners need to oversee. Blissfully knows you also need to manage:

  • Technology
  • Vendors
  • Customers
  • Employees
  • Finances

To see how Blissfully can automate, organize, and secure every aspect of your technology stack, request a demo today.