GE 2: TAM, SAM and SOM

TAM stands for Total Addressable Market. The metric is a monetary value that represents the total possible revenue available if you were to sell all of your products to every customer who may be interested in purchasing them.

SAM stands for Serviceable Addressable Market. Again, this metric is a monetary value, is smaller than the TAM and represents the total possible revenue available if you were to sell all of your products to the customers that you consider are in your target market and can be serviced by your organization within the confines of your existing business model.

SOM stands for Serviceable Obtainable Market or is sometimes translated to Share of Market. SOM too is a monetary value, is smaller than the SAM and represents your estimated obtainable share of the SAM.

So we have our the definitions, but lets dig into a bit more detail with an example. Let’s say you have a company and it has one product, a web based application to help recruiters automatically filter CVs using artificial intelligence based on a set of criteria. To calculate the TAM, we need a pricing model. If the product is already live and in use by existing customers, we could use our historic sales figures to estimate the likely future revenue we may receive from certain types and sizes of customers. If the product is not yet live, we will need to create a pricing model based on market and competitor research.

The next step is to find the number of companies that may theoretically purchase our product. This will vary based on the type of product. In our example, the recruiter application, it could be used by recruitment firms across the world, of different sizes and specializing in recruiting different industries. But hang on a moment, perhaps our application is only available in the English language and only companies where users have a good internet connection, access to the web and a modern job market really qualify. We might do this top level type of filtering now — even when calculating the TAM.

So let’s say we have 25,000 recruitment companies that qualify and we think our average selling price is going to be $5k per year. That’s a TAM of $125m. We can get a bit more sophisticated in calculating the TAM. Larger companies will pay more to serve more of their users. Different countries may have a different willingness to pay based on local economic factors and the same goes for different industries. We could bake all of those differences into our model to get a more accurate TAM calculation. But my advice is to start simple and then layer in that type of complexity as you go. Just make sure you document your assumptions and input when you present the numbers.

Now for the SAM. As mentioned before, this is the Serviceable Addressable Market. In practice this the component of the TAM that you are targeting with your current business model and product strategy. Going back to our example, perhaps we are a small UK based startup. We have decided our beach head market is going to be UK based small to mid sized firms with say less than 200 employees. Our thesis is that these firms are unlikely to have full term recruitment specialists and would be open to buying an application from a smaller software vendor. Of the 25,000 recruitment firms in our TAM, perhaps only 1,000 firms fit into this category. So our SAM becomes 1000 x $5k or $5m.

And finally the SOM, the share of the market or the serviceable obtainable market. It is not realistic to imagine that we will obtain every firm in our SAM, but we might predict with targeted marketing and a personal service we could capture 1% or 1 in every hundred firms. If we are successful, that would generate revenue of $50k. You can see the drastic reduction from $125m to $50k, but that’s ok — we are a start up and our first business goal may be to find 10 customers who are willing to pay $5k in our niche target market of UK SME firms with less than 200 employees.

Once we reach that first milestone, we are on our way to establishing product market fit and we can pull multiple levers to increase our TAM, SAM, SOM and ultimately our revenue. The important takeaway is we now have a baseline for the size of our initial market, the model can evolve, and how we choose to influence the TAM, SAM and SOM forms the basis of our future product strategy.