How to Calculate TAM, SAM, and SOM

When it comes to starting a thriving business or scaling your startup into a truly successful company, one of the most important things to consider is market size. If you want to gauge your profit potential or forecast a revenue goal, then you have to thoroughly understand how much demand there is for your product or service. These numbers have to be rooted in reality.

Without a thorough understanding of market size, you could enter a market without enough demand, risking a lack of investors, or you could set a revenue goal that’s unrealistic. In order to understand your market size and equip yourself (and any potential investors) with accurate figures, you have to know how to calculate your Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). Keep reading to learn what these terms mean and how to calculate their values.

How to Calculate TAM, SAM, and SOM

Before we get started with calculations, we first need to have a working knowledge of what TAM, SAM, and SOM mean and why they’re important to your company.

TAM

TAM stands for Total Addressable Market and is used to demonstrate your product or service’s potential. Essentially, TAM is the total possible market available for your product or service. TAM is a great tool to estimate the maximum possible revenue for your company by examining a specific market’s potential for growth. It’s also a strong indicator of market trajectory and if it’s worthy of investment.

SAM

SAM stands for Serviceable Addressable Market, and it’s the portion of your TAM you may be able to acquire based on specified customer demographics. Because of the likely inherent limitations of your business model (such as specialization or geographic limitations), you will not likely be able to service your total addressable market.

That’s why SAM is important. This figure allows you to demonstrate the sub-market formed from the various geographical, regulatory, or pricing and quality market differences within your TAM. By choosing your target demographic, you can specify your reach, hone your focus, and determine your SAM.

SOM

SOM stands for Serviceable Obtainable Market and will be the smallest number you calculate. Unless you’re a monopoly, you won’t be able to capture 100% of your SAM (serviceable addressable market). Even if you only had a single competitor, you probably couldn’t convince your total addressable market (TAM) to buy only your product or service. And that’s where SOM comes in.

Your SOM will be the sub-sector of your SAM that you can realistically target ​​given the limitations of resources, presence of competition, and level of market awareness. If you want to break it down into the simplest possible terms, think of the above figures as questions. Where will you start (SOM)? Where will you grow (SAM)? What is your company’s maximum potential (TAM)?

Calculate TAM, SAM, and SOM

Now you understand the acronyms and why they’re important to your company. But how do you actually calculate TAM, SAM, and SOM? Before you do those calculations, you’ll obviously need market research so that you have the necessary information on your market size. But once you have those figures, these are the formulas you’ll use. Let’s get started!

TAM

We’ll start with TAM. In order to calculate your total addressable market, you’ll need to run a bottom-up analysis of an industry.

Here’s the formula you’ll use: (# of accounts in a market) x (annual contract value).

The number of accounts in a market is determined by your market research. The annual contract value is determined by your company’s historical data of existing customers. What is the average purchase amount per account over a year?

Here’s an example: if your company has a market of 6,000 accounts and your annual contract value (ACV) is $1,500, then your TAM would come out to $9M.

6,000 x 1,500 = 9,000,000

SAM

Next up is SAM. In order to calculate your serviceable addressable market, you’ll want to look at all of the potential customers that would be a good fit for your company and multiply that by the average annual revenue of these types of customers in your market.

Here’s the formula you’ll use: (target segment of TAM) x (annual contract value).

While your TAM includes your entire target market, your SAM includes only the segment of that market you can actually service. Your SAM will be the percentage of your TAM that’s a good fit for your offerings, as determined by your business model.

Here’s an example: if your market is 6,000 accounts but only 3,333 of those accounts reside in the geographical area you serve, and your annual contract value (ACV) is $1,500 (as we already determined), then your SAM would come out to about $5M.

3,333 x 1,500 = 4,999,500

SOM

Finally, let’s talk about SOM. In order to calculate your serviceable obtainable market, you’ll want to divide your revenue from last year by your industry’s serviceable addressable market from last year. This percentage is your market share from last year.

Then you’ll need to multiply your market share from last year by your industry’s serviceable addressable market from this year.

Here’s the formula you’ll use: (last year’s market share) x (this year’s SAM).

Here’s an example: if last year’s SAM was $4M and your revenue was $1.5M (37.5%), and this year’s SAM was $5M (as calculated above), then you’d multiply that by .375 to get a SOM of around $1.88M.

.375 x 4,999,500 = 1,874,812.5

Use your TAM, SAM, and SOM to improve your business

Once you’ve calculated your TAM, SAM, and SOM, you can use these figures to improve your strategy. And with Churnkey, improving your strategy and boosting your company’s profitability is easier than ever. We’ll help you supercharge all aspects of customer retention and optimize your company’s growth.

Find out more with a demo or start combating churn now with a free trial.