What Does TAM SAM SOM Mean & How to Apply in Sales

What Does TAM SAM SOM Mean & How to Apply in Sales

The acronyms TAM SAM SOM — which stand for Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market, respectively — are well-known in the sales world.

These terms represent metrics that help businesses define the customer and revenue opportunities within their market.

The TAM SAM SOM metrics also provide important information for investors. This information helps potential investors evaluate the potential upside of a business (SAM), while mitigating the risk (SOM).

In this article, we’ll look more closely at TAM SAM SOM, including how to calculate them and why they’re important, and some hypothetical examples of each.

Here’s what we’ll cover:

What is TAM SAM SOM?

The acronyms TAM, SAM, and SOM deal with a business’s market size and accessibility.

TAM SAM SOM

TAM

The first and broadest of the three metrics is TAM, which stands for Total Addressable Market (sometimes Total Available Market). TAM represents the absolute maximum market size or potential revenue that a business can generate with their product or service.

TAM does not take into account competition, geographical boundaries, marketing budgets, or any other market-narrowing constraints.

SAM

Next is SAM, which stands for Serviceable Addressable Market (sometimes Serviceable Available Market). SAM is a subset of the Total Addressable Market, defined by the demographics of your product niche. The Serviceable Addressable Market shows how big of a market segment exists that can be served by your product and business model.

A basic example will help highlight the difference here. For an entrepreneur hoping to open a donut shop, their TAM would be everyone who has interest in visiting a shop that sells baked goods or sweet treats. The SAM for this business is represented by everyone who wants donuts, specifically.

SOM

The last metric to take into account is the SOM. SOM stands for Serviceable Obtainable Market, and it provides a realistic look at what share of market a business can reasonably capture in the next 3 – 5 years. To calculate the SOM, businesses need to account for competition, marketing strategies, pricing plans, and many other variables.

Illustration

Here is how MIDiA breaks it down: “TAM is how big the pond you are fishing in is, SAM is how many fish there are in the pond, and SOM is how many fish you are likely to catch.”

TAM SAM SOM fishing analogy 

Accurate TAM SAM SOM is necessary for sales forecasts, investor relationships, and resource management.

Why Is TAM SAM SOM Important?

Accurate market size metrics are important for a well-developed business plan. TAM SAM SOM helps startups and enterprise companies alike evaluate the viability of their product, and gives them the ability to solicit investors with a high degree of confidence in return.

There are other benefits to calculating these metrics, too. TAM, for example, helps businesses determine the competitiveness of their product and the extent of any untapped customer segments.

SAM helps a business hone in on their niche and plan medium-term goals.

SOM provides an opportunity for investors to mitigate risk. When calculated correctly, it provides investors and businesses with a “worst-case scenario,” in which they only successfully reach a small portion of the TAM. The TAM, on the other hand, provides the upside.

Of the three, accurately calculating SOM is most important. It proves your business case and demonstrates an ability to pinpoint and service the target market. If there turns out to be a mismatch between the SOM prediction and reality, it can lead investors to doubt a business’s capability to expand. 

Calculating TAM SAM SOM

Fortunately, there are easy-to-follow formulas for calculating each of these metrics. There is some legwork involved in the process (the TAM formula, for example, requires that teams do significant research), but the effort is well worth it.

How to Calculate TAM

To calculate TAM, multiply the total number of accounts in your market by the annual contract value of those accounts.

How to calculate TAM

There are two ways to determine the total number of accounts. A top-down approach relies on published market analysis from sources like Forrester and Gartner to estimate the size of the target market.

A bottom-up analysis, which uses primary market research, is generally considered more reliable.

Realistically, though, no company will ever win 100% of their TAM. That’s why businesses calculate SAM.

How to Calculate SAM

To calculate SAM, use the following formula:

How to calculate SAM

SAM is a very important metric. A sizable TAM means nothing if you don’t have medium- to long-term plans for consistently increasing your SAM.

The last piece of the market puzzle is SOM. A business’s SOM is a realistic, short-term look at how much of the market share they can expect to capture. It accounts for competition, pricing discrepancies, and other market-narrowing factors.

How to Calculate SOM

To calculate SOM, use the following formula:

How to calculate SOM

Again, it’s crucial that this figure is accurate. SOM acts as a litmus test for investors determining whether or not they can trust your business plan — if you can’t execute your sales plan on a well-defined fraction of the market, why should they expect you to do so on a larger scale?

How to Maximize SOM

Although large TAM figures can seem impressive, the best business opportunities for investors are often those with hefty SOM predictions. Maximizing SOM goes hand-in-hand with maximizing profitability.

Here are some ways to increase your SOM predictions, no matter your current stage of business development.

Define Your USP

The more you can define your unique selling proposition and value proposition, the more able your marketing and sales teams will be to address a larger SOM.

Unique selling proposition Venn diagram

A well-defined USP helps you stand out from competitors, and can even sometimes override other market constraints like geographical boundaries or budget concerns.

Outprice Your Competition

Another effective strategy for increasing your SOM is to do everything you can to compete on price.

Creating a successful pricing strategy

The more value you can offer at a lower price, the more likely you are to capture a bigger market share.

Outstanding Customer Service

Customers expect a personalized solution to their problems. That is, after all, the dream that most salespeople sell during the buying process.

It’s important that salespeople and/or the customer success team stay diligent in ensuring the customer feels heard, valued, and helped long after they sign a contract. Businesses should invest as much into customer success as they do into the pre-purchase stage. 

Examples of TAM SAM SOM

The concept of TAM SAM SOM can be hard to visualize in the abstract. Let’s look at a couple of concrete, hypothetical examples to help illustrate these important metrics. 

Sushi Restaurant

A sushi restaurant’s TAM would be all restaurants. With no constraining factors like geography, customer preference, production capacity, or price range, this sushi restaurant could presumably serve any customer who’s in the market to eat at a restaurant.

The SAM would be represented by those who prefer to eat at restaurants that serve Asian food (perhaps even sushi, specifically, as this is a sub-niche market) and who live within a certain radius of this particular restaurant.

The SOM for this sushi restaurant would be the customers who are willing to pay according to the price range of the menu, and who prefer the type of atmosphere the restaurant offers. Even with those constraints, though, this sushi restaurant likely won’t capture that full population. SOM should also account for the number, proximity, and success of competitors.

SaaS Software

Let’s look at a software company, where geographical constraints are less of a factor in determining market size. In our example, the company’s service is a mobile sales enablement platform that helps salespeople manage their sales collateral on their mobile devices.

The TAM for this case would be the entire sales enablement market.

The software platform in this example is built specifically for mobile devices, so that factor defines the SAM.

Finally, the software is designed for companies with 50 – 100 employees. This narrows the market down to the niche that defines the SOM.

Conclusion

Have you defined TAM SAM SOM in your business plan? How well did they measure up to your actual annual revenue? Is it time to re-evaluate the market potential or the portion of the market you’re prepared to capture in the medium term?

Feel free to use the formulas provided in the templates in this article to get you started on the process.

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