Understanding your market potential is crucial for any business strategy. This guide will walk you through calculating TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market). While the process can be complex, these steps will help you gain clear insights into your true market opportunity.
Step 1: Define Your Market
Before diving into calculations, clearly define your product or service and its target market. Consider:
- Who are your potential customers?
- What problem does your product solve?
- What alternatives exist in the market?
Step 2: Calculate TAM
TAM represents the total market demand for your product or service. There are two main approaches:
Top-Down Approach
- Start with broad market research data from reputable sources.
- Identify the total market size for your industry.
- Narrow down to your specific product category.
- Apply relevant filters (e.g., geographic restrictions, customer segments).
Example: Global software market → Enterprise software → CRM software → Cloud-based CRM.
Bottom-Up Approach
- Identify your total potential customer base.
- Determine the average revenue per customer.
- Multiply: TAM = Total Customers × Avg. Revenue per Customer.
Example: 1,000,000 potential customers × $1,000 average revenue = $1 billion TAM.
Tip: Use both approaches and compare results for a more accurate estimate.
Step 3: Determine SAM
SAM is the portion of TAM your company can realistically target with current capabilities.
- Start with your TAM figure.
- Apply filters based on your business model:
- Geographic reach
- Product features
- Customer segments
- Pricing strategy
- Estimate the percentage of TAM that fits these criteria.
- Calculate: SAM = TAM × % Addressable Market.
Example: If your cloud-based CRM targets small businesses in North America (20% of global CRM TAM), then SAM = 20% × TAM.
Step 4: Estimate SOM
SOM is the slice of SAM you can capture in the near term.
- Analyze your current or projected market share.
- Assess competitors and your unique advantages.
- Consider resources and growth capacity.
- Estimate realistic market share %.
- Calculate: SOM = SAM × Estimated Market Share.
Example: Capturing 5% of your SAM in 3 years → SOM = 5% × SAM.
Learn more in Defining & Calculating SOM.
Step 5: Validate & Refine
- Compare with industry benchmarks and competitor data.
- Consult experts or advisors.
- Use multiple data sources for cross-verification.
Step 6: Document & Reassess
Clearly document sources, assumptions, and calculations for:
- Stakeholder transparency
- Easy updates as market conditions change
- Future refinement of your methodology
Schedule regular reviews to keep TAM, SAM, and SOM up to date.
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