calculate-tam-sam-som

Calculate TAM SAM SOM

Produce a credible, bottoms-up market size estimate that quantifies the addressable opportunity across Total, Serviceable, and Obtainable segments.

Why This Is Best Practice

Adopted by: Sequoia Capital, Andreessen Horowitz, Gartner, IDC, and every venture-backed startup pitch process Impact: Sequoia's pitch framework explicitly requires TAM/SAM/SOM. a16z partners have stated market size is the #1 factor in investment decisions — a compelling, defensible TAM is required to attract top-tier venture capital. Gartner's market sizing methodology is used by 85% of Fortune 500 strategy functions for capital allocation. Why best: TAM/SAM/SOM provides a structured hierarchy that distinguishes theoretical opportunity from realistic near-term addressability, forcing intellectual honesty about go-to-market constraints.

Sources: Sequoia Capital pitch framework; a16z "What We Look for in a Business" (2020); Gartner Market Sizing Methodology; Moore "Crossing the Chasm" (2014) Chapter 5

Steps

1. Define the unit of analysis — decide what "one customer" means: a person, a household, a company, a transaction, or a subscription. Consistency of unit is required across all three calculations.

2. Choose your sizing methodology — use bottoms-up as primary (count target customers × willingness to pay × frequency). Use top-down (analyst report × applicable %) to cross-check. Never rely on top-down alone — investors dismiss "we capture 1% of a $50B market."

3. Calculate TAM (Total Addressable Market) — the revenue opportunity if 100% of the target market adopted your product at your price. Include all geographies and all sub-segments the product could theoretically serve.

   TAM = Total potential customers × Annual revenue per customer

4. Find your customer count — use: census data, industry association reports (AAAA, NAR, AMA), SEC filings of public competitors, LinkedIn company data, or government datasets (US Census, BLS, Eurostat). Cite the source.

5. Establish willingness to pay — anchor on: (a) what customers pay for the incumbent solution today, (b) percentage of the cost/problem you solve, or (c) validated pricing from customer discovery interviews. Never use a price you haven't tested.

6. Calculate SAM (Serviceable Addressable Market) — the subset of TAM your product can actually serve given: geographic constraints, go-to-market model limitations, language/regulatory barriers, and channel reach.

   SAM = TAM × (% of market your model can reach)

7. Layer in segmentation filters — apply ICP filters to TAM to get SAM: company size range, industry verticals, tech stack compatibility, decision-maker title. Each filter reduces the number.

8. Calculate SOM (Serviceable Obtainable Market) — realistic revenue you can capture in 3–5 years given: competitive share, sales capacity, CAC constraints, and organic growth rate. SOM must be defensible from a bottoms-up model.

   SOM = SAM × Realistic market share % (typically 1–10% for early-stage)

9. Validate SOM with unit economics — build a sanity check: if SOM = $50M ARR, and your ACV = $10K, you need 5,000 customers. At your current CAC and sales capacity, can you acquire 5,000 customers in 5 years? If not, SOM is too high.

10. Present with growth rate context — investors care about market trajectory as much as size. Add: CAGR of the market (cite source), tailwinds (regulations, demographic shifts, technology) and headwinds (market maturity, competitive saturation). A $1B market growing at 25% is more attractive than a $10B market declining at 5%.

Rules

• Always cite sources for customer count data — uncited numbers are dismissed as fabricated.
• TAM must be realistic: a "total global software spend" TAM for a niche B2B tool is not credible.
• SOM must derive from your actual GTM capacity, not wishful thinking.
• Never claim market share without explaining the mechanism by which you capture it.
• Show the math explicitly — investors want to stress-test the assumptions, not just see the output.

Common Mistakes

• Top-down only — "The HR software market is $15B and we capture 1%" — provides no insight into actual achievability.
• TAM = SAM — conflating total and serviceable markets signals the founder hasn't thought through go-to-market constraints.
• Stale data — using a 2019 Gartner report in 2025 makes the analysis unreliable; use the most recent data point available.
• No unit economics sanity check — a $500M SOM target with 10 salespeople and $50K ACV requires 10,000 customers — mathematically impossible in 5 years.

When NOT to Use

• Internal tools with no commercial market (no TAM exists)
• Businesses serving a single enterprise customer (replace with total contract value analysis)
• Very early pre-idea stage (rough order of magnitude estimates on a napkin are sufficient; formal sizing adds false precision)