TAM, SAM and SOM: what each one means and how to calculate them

Three acronyms appear in almost every pitch deck and business plan, usually as three nested circles on a single slide, and they are misused often enough that experienced investors skip straight to the smallest one.

TAM, SAM and SOM are a way of answering one question honestly: how much revenue is actually available to you, as opposed to how much exists somewhere in the world. Getting them right is less about arithmetic than about being willing to make the number smaller.

What each term means

TAM, the category

The total addressable market ignores you completely. It describes the category: everyone who has the problem, whether or not they have heard of you, whether or not you could sell to them, whether or not they are already under contract with someone else.

It is a useful sanity check and nothing more. A TAM under 100 million dollars tells you the category may be too small to build a venture-scale business in. A TAM of 40 billion dollars tells you almost nothing, because the number is so large that any mistake in the assumptions is invisible.

SAM, the part you could serve

The serviceable addressable market applies your real constraints. This is where most sizing exercises quietly go wrong, because people apply the same reasoning they used for TAM and simply pick a smaller percentage.

The constraints that actually shrink a TAM into a SAM are concrete:

• Geography. You sell in the United States and Canada. The European portion of the TAM is not yours this year.
• Language. Your product, documentation and support are in English only.
• Compliance. You do not have HIPAA or FedRAMP, so healthcare and public sector are out.
• Product scope. Your tool handles monthly invoicing but not usage-based billing, which removes a third of the category.
• Business model. You sell annual contracts above 10,000 dollars, so the long tail of small businesses cannot buy from you.

Applying five constraints like these usually takes a TAM down by 90 percent or more. That is correct, not pessimistic.

SOM, the part you will win

The serviceable obtainable market applies competition, capacity and time. You are not the only vendor in your SAM. Many accounts are mid-contract with someone else. Your sales team can run a finite number of cycles per year.

A useful SOM is built from capacity rather than from a percentage. If you have eight reps, each closes roughly eighteen deals a year at an average of 35,000 dollars, and you expect 70 percent of plan, the obtainable market for the year is about 3.5 million dollars. That number can be argued with, which is exactly what makes it worth putting in a deck.

How to calculate them

Bottom-up, which is the credible method

Count the buyers, multiply by the price.

1. Define the buyer precisely enough to count it: "US-based software companies with 50 to 500 employees running an in-house sales team".
2. Find the count from a source you can name: a company database, an industry association register, government statistics.
3. Multiply by a realistic annual contract value, taken from your own closed deals if you have any.
4. Show both inputs on the slide.

The advantage is that every number has a provenance, so a challenge to your TAM becomes a productive conversation about one input rather than a verdict on your credibility.

Top-down, which is faster and weaker

Take an analyst figure for the category, then apply percentages. "The global CRM market is 90 billion dollars, we target 5 percent of it, so our TAM is 4.5 billion."

The problem is that neither number is yours. The 90 billion includes segments you will never touch, and the 5 percent is an assertion. Use top-down as a cross-check on a bottom-up figure, never as the primary method.

A worked example

A company sells a scheduling tool for independent physiotherapy clinics in Canada and the United States.

TAM. Roughly 240,000 physiotherapy and rehabilitation clinics in North America. At an average of 1,800 dollars per clinic per year for practice management software, the category is about 430 million dollars.

SAM. English-language clinics only, with between 2 and 20 practitioners, that already use online booking. That is roughly 61,000 clinics, or 110 million dollars.

SOM. Four reps plus a self-serve funnel. Realistic capture in the next three years, given three entrenched incumbents, is around 3 percent of the SAM, or 3.3 million dollars in annual recurring revenue.

Notice that the TAM is the least interesting line. The SOM is the one connected to hiring, pricing and next year's plan.

Three mistakes that cost credibility

Inflating the TAM to look ambitious. A founder who sizes a 60 billion dollar TAM for a niche workflow tool is telling an investor that the definitions are loose. The rest of the model is then read with the same suspicion.

Treating SAM as a percentage of TAM. If your SAM is "20 percent of TAM" with no stated constraint behind the 20, you have not calculated a SAM. You have divided.

Ignoring the switching cost. In categories where buyers are already under contract, the practically available market in any given year is the portion whose contracts renew. That can be a quarter of the SAM, and leaving it out makes the SOM fictional.

A quick self-check

1. Can you name the source for the count in your TAM?
2. Does your SAM exclude at least three specific things, each for a stated reason?
3. Is your SOM derived from sales capacity rather than from a round percentage?
4. If someone challenged one input, could you change it and see the model update, or would the whole slide collapse?

Market sizing done this way takes an afternoon instead of ten minutes, and it produces a number you can defend in a room. That is the only kind worth calculating.