How to Calculate the TAM / SAM / SOM and Market Opportunity for a Startup

Welcome, entrepreneurs and founders, to this brief guide on how to quantify your startup's true potential by understanding its market and revenue opportunity.

In this post, we'll delve into the (infamous) world of the "TAM, SAM, SOM", understand what it means, and how to master it, with some tips and tricks along the way.

Although it sounds a little complex to the uninitiated, calculating your business or startup's market and revenue opportunity is one of the first endeavours that you should be ticking-off on the start of your journey, as it's one of the most fundamental methods of validating your ideas and plans. It can either prove or disprove that your big startup or venture idea 'has legs' and that there is a big enough market for you to target and potentially capture.

It can help you to pivot early on: either to expand your opportunity and target audience, or to refine your audience to a more niche segment.

If you're looking to raise external investment as part of your startup's journey, any good investor will no doubt expect to see this as part of your overall pitch. The most common acronyms or phrase you'll likely hear on this topic is... "What's your TAM / SAM / SOM...?"

So, let's dive in... and address the elephant in the room... what the heck is it?

These are the three types of market and revenue opportunity metrics that are commonly used to showcase the size of the overall market that your startup will operate in, the slice of that market that you will target specifically, and the likely segment that you can realistically capture.

Total Addressable Market (TAM):

First up, let's talk about 'TAM'. This is like the vast ocean of your potential customers, and it represents the total revenue opportunity available if you were to capture 100% of the market (assuming no competition).

It signifies the highest potential revenue a business could achieve in the market by converting all potential customers into paying customers, where each customer is providing the maximum revenue.

Example: Imagine you’re in the eco-friendly tech industry. Your TAM would include everyone worldwide who could benefit from sustainable tech solutions. If that seems a little excessive, well, it's supposed to be. Use this to demonstrate the vastness of the problem, and glaring need for a solution, with your startups product or service.

How to Calculate: This one is mainly driven by desktop research - and using statistical online sources, such as Statista.com or research / industry publications, to identify the size of your target market.

Serviceable Addressable Market (SAM):

Next up is your 'SAM'. This is where things get more realistic... The SAM narrows down that gigantic TAM into the portion of the market that you can realistically target with your resources and strategies. This is often done by applying geographic or demographic limitations.

Example: Say you're in the pet wearables business targeting dog owners in the US. Your SAM would focus on dog owners interested in tracking their pet’s health through wearable devices – a more relatable and tangible segment.

How to Calculate: You take your TAM figure and narrow down this down through specific metrics and factors. For example, if the TAM is 100 million consumers worldwide, but you're only targeting the German market (population: 84mil), then your SAM calculation would be:

100 mil / 8 bil people (world population) X 84 mil = 1.05 million consumers.

Serviceable Obtainable Market (SOM):

Lastly, we have SOM. This is the slice of the cake that you aim to grab within your SAM, and what is realistically possible. It's crucial to set realistic SOM goals to gauge how you’ll penetrate the market and grow over time.

Example: If you're running a plant-based meal kit service, your SOM might be aiming to capture 10% of the health-conscious subscribers in your SAM segment – carving out your impactful presence in the market.

How to Calculate: Again, you simply apply further limitations to narrow your SAM figure, or assume that you could likely capture, say, 5% of the SAM.

Crunching the Numbers: An Example:

Let's put this into perspective with another quick example. Imagine you're launching a boutique fitness brand targeting working professionals in urban areas. Here's a simplified breakdown:

• TAM : All health-conscious individuals in urban areas globally.

• SAM : Health-conscious working professionals in London.

• SOM : 15% of all health-conscious working professionals in London.

By calculating your TAM, SAM, and SOM, you gain a strategic edge, understanding not only the vast market potential but also where your best chances for success lie.

These numbers will also help to visualise and demonstrate your startup's roadmap to success, as well as underpinning your go-to-market strategies. By knowing your TAM, SAM, and SOM, you can tailor your business plan, marketing strategies, and growth projections accordingly.

'Bottom-Up' vs. 'Top-Down':

Before we leave you thinking that this exercise was a piece of cake... there's one more crucial element to market sizing that you should understand.

To quantify your revenue opportunity, you'll need to research what the total annual revenue figures are for your industry, before you can narrow this down to your specific, niche target segments. This method is referred to as the 'Top-Down' calculation, as seen in the image with the vegan cheese market.

But whilst it's logical to do this for the TAM and SAM figures, as they are more high-level assessments, you should aim to be more accurate for your SOM calculation. One of doing this is by using the 'Bottom-Up' method.

The bottom-up method takes the total number of customers that you estimate being able capture at the SOM level, and then multiplying that by your estimated LTV (Customer Lifetime Value) figure. Your LTV (or 'CLTV') is calculated simply as: the Average Annual Revenue per Customer X Average Customer Lifetime (in years). So for example, if the average customer will spend £500 per year, with an estimated lifetime of 2 years, then the LTV will be £1,000.

So, if your SOM is estimated to be 10,000 potential obtainable customers, then your potential revenue opportunity would be: £10 million

This provides a much more realistic, accurate and well-thought out calculation, rather than just saying that you will obtain 1% of a £100 billion market. As a result, investors will be more confident of your figures, and they won't come across as vague or inflated.

You can also use the Bottom Up method for the SAM and TAM too, by using the SOM figure and working backwards.

Wrap Up:

Hopefully now with that whistle-stop tour of market sizing for startups, you've gained a good understanding of why it's important and how to nail it.

It's worth finishing up by stressing that the more time and effort you put into research to support these calculations, the more confident you can be, and investors will be. When presenting your figures, a key tip is try to include the links to your research so that an investor can easily cross-check for themselves.

As you prepare to launch your startup, never underestimate the power of understanding your market opportunity. TAM, SAM, and SOM are not just acronyms or formalities, but the keys to unlocking your revenue potential and driving your business' strategies, and the compass that guides you towards your startup's 'north star'.