TAM, SAM, SOM stands for
- TAM (Total Addressable Market): How many people are in the market for this product?
- SAM (Serviceable Addressable Market): How many of those could we reach?
- SOM (Serviceable Obtainable Market): How many of those could we convert to our product?
Itās a 3 part framework that helps you validate whether an opportunity is worth pursuing. It forces you to work through strategic horizons to identify, narrow down and understand your possible customer base at every step.
You can think of TAM SAM SOM as a discovery tool, and a core component of finding product market fit.
A drill down or narrowing segments of users in a group
‘TAM SAM SOM is a vital X-ray of a product’s viability. TAM reflects desirability (‘How many people want this?’), SAM reflects feasibility (‘How many can we reach?’), and SOM reflects viability (‘How many will we realistically win?’)‘ – Deep Shah, Product Lead
TAM SAM SOM Cheat Sheet
Weāve made a TAM SAM SOM cheatsheet which contains:
- When to use TAM, SAM, SOM
- Worked B2C / B2B examples of TAM SAM SOM calculations
Get the TAM SAM SOM Cheatsheet
What is TAM, SAM, SOM?
TAM, SAM, SOM is a progressive methodology to narrow in on your target market and ICP (Ideal Customer Profile). Itās a way to understand who your end user is, and think through how you reach them. Your market is the target customer, and vice versa. At its core, TAM SAM SOM is deeply customer centric.
You start with everyone possibly available in a market (TAM: total addressable market), then narrow down to people you could actually serve (SAM: serviceable addressable market) and then narrow down further to people you could actually gain as customers (SOM: serviceable obtainable market).
āSo you have your TAM, your total addressable market. That’s the biggest circle of people that you would ever really address, and then narrowing in from there. So that each circle is contained in the larger one before it, till we get to an individual model user. And that’s really who we’re speaking to.ā Arielle Jackson
TAM, SAM, SOM matter in product development:
- Clear customer understanding: if you donāt really know and understand your end user, you canāt build good products. TAM SAM SOM forces rigour.
- Confidence meter: TAM, SAM, SOM line up well to strategic horizons. At each stage youāre gathering more information, refining your customer profile, and understanding your user better
- PMF: product market fit is a function of demand (how many people want it), solution (how you serve the demand), and distribution (how you acquire customers). TAM, SAM, SOM forces you to think through these in turn
- ROI: if there arenāt customers for your product, or not enough customers, you wonāt get payback on your work
This is regardless of whether youāre building features or new businesses. Knowing who your user is, their core characteristics, how many of them there are, and how many can be reached is a core part of roadmap ideation and impact modelling.
Strategic horizons: Ice, Water, Steam are explained in our Design Thinking Guide
When to use TAM SAM SOM
The reality is that each part of the TAM SAM SOM framework has limitations. TAM is a wildly big number, SAM inevitably misses constraints or makes bad constraint choices, and SOM numbers usually have to be refined financially and via the university of life.
That doesnāt mean the framework has no utility. Thinking through TAM SAM SOM forces rigour when it comes to product development:
- What to build
- Who for
- When to see traction
- What has to be true
Like many frameworks and models, itās not intended to be 100% right, itās intended to be useful – as a discussion, strategy and fundraising tool. It’s best used as a framework for net new products, services and businesses.
Strengths, limitations and when to use TAM SAM SOM
Calculating TAM SAM SOM
You calculate TAM, SAM, SOM by:
- TAM: Defining your customer universe, what they spend, and validating a bottom up calculation against any available industry data
- SAM: Figuring out what you could realistically deliver based on constraints, and excluding customers from your customer universe
- SOM: Setting timelines, and then working through how many customers you could realistically acquire within the timeframe
The output of all of these is a revenue number (xx$$), but the critical component of the calculation is the customer count.
Nailing that and then layering in proposed pricing is how you get to the revenue output. Donāt be distracted by revenue figures: customer count is at the core of each stage of the calculation.
TAM: Total Addressable Market
This is an estimate of the total revenue opportunity available if everyone who might use your service used your service. Itās the absolute maximum revenue available in the space. Think big round numbers, and of this as a rough sizing to begin your refinement process.
Itās often initially calculated top down using market research (Gartner, Forrester, McKinsey), which tends to be a dollar number.
But the best approach is to do it bottom up, using customer counts from locations like Linkedin, and then layer price data to get to the revenue output. Then cross check with top down data.
See fully worked examples in the TAM SAM SOM Cheatsheet
Once a business has been running for a while, or once a business has gathered more customer data, they typically refine this calculation by layering in pricing data.
Examples
Low cost airline
1,000,000 people fly in Europe annually
The average price weāll charge for a flight is 85 euro
Therefore our TAM is 85m euro
Hustle Badger
There are 2.4m product managers in the world
We intend to charge Ā£399 per cohort
Therefore the TAM would be Ā£958m
New feature for an Enterprise grade email & CRM system
350m worldwide use marketing CRM systems
We intend to charge $39 per user for the first year to be competitive
For AI content drafters in marketing CRM systems, the TAM is ~14bn in year 1
Why TAM is useful
It forces you to make some immediate decisions about your customer base. For example, when we were launching Hustle Badger, we made a choice between product managers as our target market, or everyone who worked in tech.
The second is that this metric is often used as a quick way to estimate if a segment is interesting enough to launch a business or a new product in.
Jeff Bezos is famous for asking āIs it a big problem?ā and Marc Andreesen is famous for thinking that the size of this market is the most important factor in a businessā success.
āIn a great marketāa market with lots of real potential customersāthe market pulls product out of the startupā¦ The product doesnāt need to be great; it just has to basically work. And, the market doesnāt care how good the team is, as long as the team can produce that viable productā¦. Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesnāt matterāyouāre going to fail.ā – Marc Andreesen
Put another way, if thereās no latent demand, or not enough demand, itās not worth doing, even if you can do it really well. There has to be a market for the product, and thatās what calculating TAM tells you.
This is also known as Rachleffās law.
āThe #1 company-killer is lack of market: When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.ā
Caveat: this is a venture capital firm view of the world. VCs like big TAMs, because they are spread betting across multiple markets and companies, with the view of achieving 10x returns by only backing 1 out of 10 viable companies.
Your company does not need to be venture scale to look for viable TAMs. Itās contextual. One companyās big TAM is another companyās non viable segment.
āWhat do Product Hunt, Trello, Balsamiq, Basecamp, Things, DuckDuckGo, Brain.fm, and many of your favorite products have in common? Theyāre beloved, have millions of users, and likely generate tens of millions of dollars a year, but, like your idea and 99.9% of new startup ideas, they will never be āventure-scale.ā And thatās OK.ā- Lenny Rachitsky, Iāve been Told My Idea Isnāt Venture Scale
Finally, you need to start with TAM to get to SOM. Knowing your SOM, helps pitch your TAM. SOM is your execution plan.
However youāll already see some of the problems with the framework if youāre using it as a discovery or ROI tool. Not everyone is going to buy your product. This brings us onto the next stage of refining your number.
SAM: Serviceable Addressable Market
SAM is about segmentation. You wonāt be able to appeal to or capture the whole TAM.
This is where you start to refine your TAM number into something more realistic, based on obvious constraints.
Obvious constraints you can layer in include:
- Demographics: such as men vs women, age ranges
- Pricing strategy: such as luxury vs cheap goods, add ons for baggage, speed, and so on
- Language: What language people will transact in, and which languages you serve
- Geography: Company location, service delivery points, or localized data storage
- Regulation: Any major regulatory constraints, such as people who require SOC2 compliance or GAAP accounting requirements
- Business model & GTM: Primarily for industries where distribution is codified, and there are barriers to entry. For example, industries dominated by channel partners. If you need some established scale to be accepted by those channel partners, youāll be playing in a much smaller pool to begin with
- Other constraints: these could be legal requirements or restrictions, or pay to play requirements that canāt be met by an MVP or a start up. For example, Hustle Badger has no sales team and is bootstrapped, so we launched with self-serve products.
The best way to figure out what these are is to get key people in room and brainstorm questions like:
- Why wouldnāt we be able to sell this product?
- Who isnāt going to buy and why?
- What are we missing from a legal, cost, regulation, and so on perspective?
- Who canāt we serve?
SAM is the next stage of decision making and discovery that helps you think through factors that might restrict your market. Itās a key research phase in refining your product and solution <> demand match. Your product choices restrict the available market size.
Working through SAM will meaningfully change your TAM number. Youāre drilling down into the real market segment youāll be playing in, and youāre starting to make more and more decisions about the product, the user, and what youāll build.
See fully worked examples in the TAM SAM SOM Cheatsheet
SOM: Serviceable Obtainable Market
Once youāve figured out your SAM, the question is how much of the SAM you can capture, and by when.
This forces you to think through the other key component of PMF – distribution.
Product Market Fit Guide
Product market fit is a function of demand (TAM, SAM), solution (product), and distribution (SOM).
Distribution informs your solution design, pricing, and go to market strategy, whereas your customer profile determines where your users live, and how you reach them via go to market.
Put it another way, certain product types have to use certain go to the market methods, which informs what sort of product you build, how you price it, and what the TAM and SAM are.
You should see this as a loop where you stress test at each stage the viability of your assumptions so far.
You should do this bottom up, based on how many customers youāll get, from where, and by when. This is a good exercise to work with your commercial colleagues, or founders with.
See fully worked examples in the TAM SAM SOM Cheatsheet
Calculating a detailed SOM bottom up
āWhere are the cash registers? How does every dollar of that TAM get transacted? This should be broken down by buyer type/role, industry, segment (SMB thru large enterprise and government), geography, product category, and business model.ā – Jay McBain
Certain business models and industries have certain ways to gain revenue. Different channels have different barriers to entry and speed to scale.
As a simple rule of thumb, for:
- B2B / Enterprise: assume you need sales headcount, and assume that headcount needs time to ramp, and that you have to acquire leads through paid or channel activities
- B2C / Self Serve: assume you need marketing headcount or agencies to create a broader marketing and traffic mix, and that thereās only so many marketing channels and effective routes to market
You should analyze competitor acquisition strategies and mix carefully, and be reasonable about what you can achieve.
Impact Modelling for your Roadmap Guide
Realistic timelines are critical at this stage:
- How many people can you realistically serve?
- Where do they hang out, and how long will it take to reach them?
- Will your product serve them perfectly right away, or do you need to build in product refinement time?
Donāt be too optimistic here. The best SOM calculations are based on finding a small customer pool and investing refinement time to get to credible indicators of product market fit.
Dimensions of Product Market Fit
After youāve calculated a revenue number for SOM, the next stage is to look at ROI. How much money are you investing and how much are you getting back?
You can then refine these numbers for projected ROI by looking at
- Direct costs of revenue: headcount on the marketing and sales sides, marketing spend, channel partner cuts, and so on
- Expected lifetime: for how long you expect to keep the customers
- Churn: how much churn you expect
- Tax and refund rate: how much of the revenue youāll pay out
- High medium low scenarios: best case, worst case
Top down from TAM
The other way to calculate SOM is to assume you can capture a percentage of TAM by a certain time and work back from that to set Y1, Y2, etc goals.
In large markets, without winner takes all dynamics, 1% market share is often considered a good result years 1-2, with new brands typically taking longer and established players needing less time.
Often a 1% rule of thumb is used to prove viability before detailed planning occurs.
For example, even Steve Jobs set a 1% of the cellphone market target for the iPhone, which worked out at 10 million Y1.
Top down only estimates are extremely risky. They should always be paired with bottom up calculations, and when choices have to be made, bottom up should win out. Your goal is to triangulate your calculations via multiple data sources, and get comfortable that you are projecting a reasonable range.
However, top down estimates like this from your TAM are great ways to sanity check your modelling. Is it in line? Are you being wildly over or under-ambitious? Have you sourced the right data?
Competitor analysis:
Analyse competitor market share, what you believe you can steal, and how long it took them to scale up. This will likely be available in founder comms, or investor presentations.
This step is really critical to ground your assumptions. Itās highly unlikely that you will meaningfully outperform them, or that there are marketing channels they havenāt tested.
Budget
Hiring sales people sounds great, but can you afford them? Will they pay back in the long run? What assumptions would you need to validate or stress test?
The bottom line here is that youāre making a plan which feels like it could work. You want this to look feasible and feel viable.
It shouldnāt look ridiculously hard to get to your SOM number. If it does, go back to the beginning – is this the right target market? Is something wrong with the servicing proposition?
Making calculations robust
Thereās good and bad ways to get to the numbers, and effective ways to stress test your assumptions.
Core principles:
- Top down sense checks: Work up from target users and sensible assumptions, and sense check top down based on research data and rules of thumb
- Intentional and honest constraints: Every constraint is both a product choice and a future expansion lever, based on removing the constraint
- Model hygiene: write down why you think what you do (sources, notes, etc)
- Real data wins: Anchor in any real world data you can source from speaking to users, or on competitors, other market research materials, real Linkedin numbers and so on
Top down sense checks
Top down data helps to:
- Cross check your modelling: hygiene check on assumptions
- Show potential: start ups tend to be innovative – the delta between bottom up modelling and top down big market sizing is āthe invisible marketā – the customer you canāt yet see, but could acquire based on product success
Constraints as friends
Constraints donāt only help you refine your product. They help you establish your growth roadmap.
Market modelling is a way to prepare for known unknowns, and position your product to take advantage of growth trends which accelerate customer adoption.
āUltimately, TAM, SAM, and SOM arenāt just financial estimates ā theyāre reflections of your strategic thinking. They show whether you understand who your customer is, how to reach them, and what it takes to win.ā – Chris Tottman, Founders Corner | Notion.vc
You can conceptualize your TAM as being composed of 3 parts:
- Known market: what youāll initially replace. This is āHow do I build something which is viable today?ā This is your SOM.
- Emerging market: a market segment where users are adopting products that could go mainstream. Your SAM. āHow do I build something viable for this group which has expansion potential?ā
- Invisible market: a market which doesnāt exist yet. Think AI or the smart phone. Your TAM. āHow do I create or transform a market?ā
Often builders think of their SOM as their beachhead, or entrance segment. By serving that customer group super well, they can expand out to other segments, and benefit from word of mouth and brand network effects. If you canāt make a small group of target users sticky advocates, you canāt conquer the market.
āYou have to know who those first users are and how you’re going to get them. Then you’re going to sit down and just have a party with those first few users and focus entirely on them and making them super super happy.ā – Paul Graham
Superhuman is a famous example. They could have built for their TAM (everyone with email). But they focused on a beachhead SOM segment of “Busy professionals who live in their inbox”. Only once they achieved 40%+ very disappointed ratings on their PMF survey, did they layer in new services and segments for adjacent customer groups. Serve one customer set at once.
This means when narrowing down to your SOM, you need to be intentional about which constraints you adopt and which you break. You canāt make a segment happy with a me-too or this is whatās easiest to build product.
Superhuman Product Market Fit Case Study
Model hygiene
Write down every assumption you made, and link to every source of data. Youāre not trying to be omniscient, youāre trying to work with colleagues to get to the best outcome. If you donāt stress test every assumption and explain every aspect of your work, the questions will come.
Memory also erodes over time. There’s nothing worse than getting challenged on your numbers and not being able to remember where you got them from.
Real data wins
Gather as much real industry, competitor and customer information as you can. Create a library section in your model and link it all for easy reference.
But remember that any real customer conversation beats every model. The more user conversations you have, the more you understand their needs and start defining segments based on real users the better. Numbers must be grounded, and based on real customer conversations – otherwise this is a meaningless modelling project.
Wrap up on TAM, SAM, SOM
TAM SAM SOM is a PMF framework and process that, done right, forces rigour in product development. Itās received a bad rap in the past via top down estimates, and assumptions built off broad market research reports.
Making the effort to calculate TAM SAM SOM bottom up, triangulating via multiple data sources, stress testing via competitor analysis, and sense testing from top down estimates will help you build better products, achieve ROI, and build credible plans. At its core, this is all about the customer, so ground your assumptions in customer conversations and discovery.
Hustle Badger Resources
Articles:
Bitesize courses (1 hour):
In depth courses:
Other Resources
FAQs about TAM SAM SOM
What’s the difference between TAM, SAM, and SOM?
TAM (Total Addressable Market): How many people are in the market for this product?
SAM (Serviceable Addressable Market): How many of those could we reach?
SOM (Serviceable Obtainable Market): How many of those could we convert to our product?
It’s a progressive framework where you eliminate customer segments at each stage in order to zero in on a workable plan. Think of it as equivalent to strategic horizons.
Where can I find a TAM SAM SOM Cheat Sheet?
You can find a TAM SAM SOM Cheat Sheet here. It includes a dos and don’ts guide, definitions, what it’s useful for, and 4 fully worked examples for both self servce / B2C and B2B businesses.
