Glossary
What Is TAM, SAM and SOM?
Updated · Team Fonda
Short answer
TAM, SAM and SOM are three ways to size a market. TAM (total addressable market) is all the revenue available if every possible customer bought. SAM (serviceable available market) is the part your product and reach can serve. SOM (serviceable obtainable market) is the part you can realistically win in the next few years.
Key takeaways
- TAM is the whole market, SAM is the slice you can serve, SOM is the slice you can win.
- Each one is smaller than the one before it.
- Build the numbers bottom-up: count customers and multiply by what each pays per year.
- SOM is the figure your own revenue plan should rest on.
What TAM, SAM and SOM mean in plain words
| Term | Stands for | The question it answers |
|---|---|---|
| TAM | Total addressable market | How big is the prize if everyone with this problem bought a solution? |
| SAM | Serviceable available market | How much of that can my product, language, location and channels reach? |
| SOM | Serviceable obtainable market | How much of that can I win in the next few years, given competitors and my resources? |
You will also see SAM written as serviceable addressable market. It means the same thing. Picture three circles, one inside the other. The outer circle tells an investor whether the opportunity is worth their time. The inner circle tells you what to put in your own forecast.
How to calculate TAM, SAM and SOM
Bottom-up formulas
TAM = all potential customers x annual revenue per customer. SAM = customers you can serve x annual revenue per customer. SOM = SAM x the share you can realistically win.
There are two methods. Top-down starts from a published industry figure and cuts it down by percentages. It is fast, but the result depends on someone else's definition of the market. Bottom-up starts from a count of real customers and your real price. It takes longer and is easier to defend, because every input can be checked.
Use public data for the customer count, such as government business registers, census tables or trade body reports, and say where each number came from. The TAM SAM SOM calculator does the arithmetic, and how to calculate TAM, SAM and SOM covers the research in more depth.
A worked example
The figures below are invented for illustration. Say you sell booking software to independent yoga studios for $100 a month, which is $1,200 a year.
| Layer | Customers in the example | Calculation | Result |
|---|---|---|---|
| TAM | 20,000 independent studios in your country | 20,000 x $1,200 | $24,000,000 a year |
| SAM | 6,000 studios with three or more teachers, in the regions you can sell to | 6,000 x $1,200 | $7,200,000 a year |
| SOM | 3% of SAM within three years, or 180 studios | 180 x $1,200 | $216,000 a year |
Example numbers only. Replace each one with a figure you can source.
The 3% is itself a guess, so test it. If you can sign up five studios a month through direct outreach, 180 studios takes three years. That cross-check against your sales capacity makes a SOM believable.
Why it matters and when you meet it
Market size tells you whether an idea can become the kind of business you want. A market that is too small can still support a good one-person business, but it will not interest venture capital investors. Knowing which you have saves you from pitching the wrong people.
You meet these terms twice. First during market research, when you decide whether the idea is worth testing. Fonda's Validate phase starts with a Market step for this reason, and its reports cite their sources. You meet them again when you write the market chapter of a business plan or the market slide of a pitch deck.
Common mistakes
- The 1% claim. "If we get 1% of a huge market" explains nothing about how you will win those customers.
- Counting people who cannot buy. Leave out customers you cannot legally, physically or affordably serve.
- Mixing units. Keep every layer as revenue per year, using the same price.
- Using someone else's market. A report on all fitness spending is not the market for yoga studio software.
- No sources. A reader should be able to check every count.
Related terms
- Ideal customer profile: the description of who counts as a customer in your SAM.
- Competitive analysis: the study of rivals that sets a sensible SOM.
- Go-to-market strategy: the plan for how you will reach the customers in your SOM.
Frequently asked questions
What is a good TAM for a startup?
It depends on your goal. Investors who need very large returns look for very large markets. If you are building a business to support yourself or a small team, a modest market you can reach cheaply can be the better choice.
Is TAM measured in customers or in revenue?
Usually in revenue per year. Start from a customer count, then multiply by what one customer pays you in a year so all three layers can be compared.
What is the difference between SAM and SOM?
SAM is everyone you could serve with your current product and reach. SOM is the share of those you expect to win, after allowing for competitors, your budget and how many sales you can make.
How often should you update your market size?
Update it when your price, target customer or territory changes, and before any fundraising. Launching a new product or entering a new country changes all three figures.