TAM, SAM and SOM are three nested numbers: the whole market for a problem, the part of it you can actually reach, and the part you could win in a year. Most founders quote the first and plan as if it were the third. Here is what each one means, one worked example, and how to calculate yours without opening a spreadsheet.
What does TAM mean?
TAM is total addressable market: the annual revenue available if every buyer of the thing you sell, everywhere, bought from you. Calculate it as the number of buyers multiplied by what each pays in a year.
It is the biggest of the three numbers and the least useful one, for a specific reason: nothing about your business limits it. A language you do not speak, a country you cannot invoice in, a customer who would never buy from a company with three people in it, all count towards TAM. Investors discount the figure for exactly this reason, and founders lead with it because it is flattering and easy to inflate.
Two errors account for most bad TAM figures. The first is counting people who have the problem but would never pay to solve it. Plenty of people are mildly annoyed by something and would not spend a dollar on it. The second is counting a global market for a business that can only serve one city. Both make the number bigger and neither makes the business more real.
What does SAM mean?
SAM is serviceable addressable market: the part of the TAM your business can actually serve. It is bounded by things you can list rather than things you can imagine: geography, language, the channel you sell through, and what you are able to deliver.
A service business in one city has a small SAM regardless of a global TAM. A product that needs a local bank account has a SAM limited to that country. A tool sold through one industry's professional body has a SAM of that body's members.
This is the first number that says something about your business rather than about the world. It is usually much smaller than the TAM and much more defensible, because every boundary on it is a fact you can point to.
What does SOM mean?
SOM is serviceable obtainable market: the share of the SAM you could realistically win in a year or two, given that other companies are selling there now.
This is the number to build a plan against. It is also the only one of the three you can be wrong about in a useful way, because it is the only one that depends on you. It changes with your price, your reach and how good the thing actually is.
Estimating SOM is where founders get either defeatist or grand. Both are avoidable if you anchor it to something observable: a percentage of the SAM that a company of your size and age could take while two or three competitors are already selling. If you cannot say who those competitors are, that is a finding in itself and worth more than the number.
TAM, SAM and SOM: a worked example
The numbers below are round and invented for the example. Yours will be different, and you will have to find each input rather than estimate it.
Take a booking tool for independent physiotherapy clinics.
TAM. Every physiotherapy clinic in the world that buys booking software, multiplied by an annual licence price. Large, and it tells you nothing you can act on this year.
SAM. Clinics in Australia that would buy booking software from an Australian supplier. To get the buyer count, use the published register of registered practitioners and clinics; professional bodies publish these counts. To get the price, use what the incumbents charge per clinic per year, taken from their public pricing pages with the date you looked.
Say the register gives you 4,000 clinics and the incumbents charge $300 a year. That is $1.2 million a year of serviceable market. Those two inputs are checkable: one is a public count, the other is a competitor's published price.
SOM. Of that $1.2 million, what could a new tool win in two years while two established products are already selling? Two percent is $24,000. Ten percent is $120,000. The gap between those two is the whole strategy, and it is worth arguing about before you write any code.
The TAM was the only number that felt good. The SAM is the only number you can defend in a conversation. The SOM is the only number that decides anything.
You can run your own idea through the market size calculator in three fields: how many people have the problem, how many you could reach, and what each pays.
How to calculate TAM, SAM and SOM
There are three methods, and they are worth knowing in order of reliability for a new business.
Bottom-up. Count the buyers and multiply by the annual price. This is the one to trust first, because every input is a fact: a register, a membership list, a competitor's pricing page. It is slower and it is checkable.
Top-down. Start from a published market total and cut it down. Fast, and almost always too large, because the market report is describing a bigger category than the one you sell into. Use it as a sanity check on your bottom-up number, never as the headline. If you do quote it, name the report and the date, because market reports go stale faster than anyone admits.
Value theory. Multiply what the current workaround costs people by how many people are paying it. This is the right method when the product is new enough that no category exists for it yet. It also makes the honest case for the business: if the workaround costs nothing, the market is smaller than the problem suggests.
Whichever method you use, write down where each input came from and when you looked. A market size is an argument, and an argument without sources is a guess with formatting.
Which number should you build for?
SOM. And the first version of SOM is not a market model at all. It is your first ten customers and what they actually paid.
That is not a reason to skip the calculation. The model is a check on the plan, not a substitute for evidence, and the two answer different questions. The model says whether the business could work at all. The evidence says whether this one does. Run the demand test early enough that the model is still worth revising.
The order matters. If you size the market first and sell second, you spend a fortnight on arithmetic and a season on an assumption. If you sell first and size second, the arithmetic takes an afternoon and tells you what to do next.
When do the numbers change?
After the first test, and after the first price change. Those are the two moments when an assumption becomes an observation.
A market size is a snapshot of a set of assumptions, and it should carry a date for that reason. If the figure you are quoting is two years old, it is describing a different market and a different business. Re-run the calculation when the price moves, when the channel changes, or when a first test tells you the buyer is not who you thought.
Check yours now
If you have not sized your market yet, the fastest honest version is three fields: how many people have this problem, how many of them you could reach this year, and what they would pay. The market size calculator does that arithmetic and shows the ceiling, so you can see immediately whether the idea is a business or a hobby.
Still choosing what to size? The free business idea generator interviews you about your life, your skills and what you have to work with, and comes back with three or four ideas shaped around you. Pick the one that survives the sizing.
