What Is TAM SAM SOM?

July 13, 2024

6 min read

IN THIS ARTICLE

"How do I find more customers?" Here's how every SaaS start-up can map out its market and begin finding more of the right customers.

While speaking to 50+ SaaS start-up leaders, a pattern has emerged with market sizing and building a market strategy. These are crucial elements of product marketing.

Today, I'm explaining why you need to find your target market, how to gauge the market opportunities, and why you don't need expensive market researchers to do it for you.

Oh, and did I mention there's a FREE TAM SAM SOM PowerPoint template for you at the end?

Let's go!

What Is A Total Addressable Market (TAM)?

TAM, or total addressable market, describes the total market of companies that need software and services like yours.

Determining which specific markets you can go after is a natural starting point when businesses plan.

Knowing the total number of potential customers will give you a sense of the possible.

Your TAM shapes your business's 5-year goals. Getting the lion's share of the TAM takes considerable effort and resources.

What Is A Serviceable Available Market (SAM)?

SAM, or serviceable available market, is a segment of your TAM. It is found by funneling the TAM based on your business (its geography and industry regulations, for example).

It's the next step once you understand the size of the total pie available. SaaS leaders need to consider what portion of the market they can capture.

Your SAM is used to create 3-year goals for your business. Your medium-term plan should revolve around owning part of the SAM, provided you can scale resources to achieve this.

What Is A Serviceable Obtainable Market (SOM)?

SOM, or serviceable obtainable market, is the realistic market you can win based on your resources, competitive intensity, and buyer appetite.

This requires eyes that can realistically examine your products and services, and internal resources (skills, knowledge, budget, and headcount).

All too often, SaaS leaders set crazy goals at the SOM level. Remember, you want to understand how much revenue and market share you can reasonably expect.

When you layer all three together, you get this TAM SAM SOM diagram:

tam sam som diagram

Why Does Sizing Markets Matter?

A market strategy aims to understand and map the world you want to conquer.

Knowing what you can achieve today, next year, and in five years is crucial for a SaaS company. It is important to you, your team, and your investors.

Here are a couple reasons why it's essential to know your market opportunity:

  • Revenue is king for any SaaS start-up, and market sizing is the first step to knowing if you're playing the right ballpark
  • Understanding your market is important for creating your ideal customer profile and buyer personas, crucial elements of your market strategy.
  • You can shape your revenue goals around the findings
  • You'll get closer to your buyers and focus on what works and what they want
  • You can build funding round proposals and hiring plans on solid data

 

The Differences Between TAM SAM SOM

At a simple level, these three levels are different in this way:

  • TAM looks at a total market - no limitations
  • SAM looks at a segment of the market you can achieve
  • SOM looks at that segment with the layer of your resource and previous results.

Based on your business and its maturity, there are three other ways to see the differences between these segments.


Existing Market

If you're a company in an existing market, it's safe to say that you'll take a bottom-up approach.

You know your revenue, and you need to run a TAM calculation through to SAM to understand your market share.


Start-Up / Pre-Revenue

If you're a start-up or pre-revenue, you'll research with prospects, work with analysts and industry publications, and use tools like Apollo to find the market opportunity.

That's a top-down approach. Starting at your addressable market and moving down.


Blue Ocean

If you want to create a market with the elusive blue ocean, you'll need extensive research on potential customers to gauge its viability.

This, again, is a top-down model where you're running market research to gauge your opportunity.

TAM SAM SOM Example

How does this all come together? Let's run through an example.

Who are we?

We're a US SaaS provider in Transport Management Systems based on the East Coast.

Our current ARR (annual recurring revenue) is $1,266,000.

We want to resize the market to determine our financial goals for the next year and make any necessary changes internally.

How do we get the data?

We have a HubSpot CRM of sales data and a finance person ready to share the current revenue split by licenses and one-time revenue (services).

We look out to Apollo to help us focus on East Coast-based companies that match our persona and start to see that we have a universe of 2,000 companies we can call our total addressable market. That's up from the previous year's count; great!

We also look to Gartner for any reports on our category, likewise G2. This lets us know that our category is growing, and we keep that in mind as we explore targets for the next year.

Moving down to the obtainable market, we know we're a growing team of 10 people with only two sales reps.

They have strong industry knowledge, but they're only two people. Therefore, we need to reduce the SAM to 43% of the TAM.

Burnout is real, and we don't want that with our team, so we are asking them to look at the Midwest or West Coast.

Last year's revenue was $1,266,000, the SAM was $15,825,000, and our market share was 6% (because we've done this exercise before).

With our current resources and knowledge that our SAM has grown to $20,616,330, we set a growth goal of $383,306.40. Thanks to the data we've gathered, we know what segments to target for growth.

Market sizing SaaS example calculation

We put all the data into a spreadsheet like this:

total addressable market template excel screenshot

We see these conclusions for our following financial year targets and rumblings of our go-to-market strategy:

  • We need to focus on increasing market share across each vertical
  • Our best opportunity to drive growth is in small businesses with 20-99 heads. These have a high contract value, and we have only captured 34% of the market
  • We should focus less on enterprise and run an ICP experiment via research to understand our shortcomings
  • Increasing our total market share to 8% will lead to a revenue increase of $383,306.40
  • We must ask ourselves if two sales reps are enough to achieve this revenue goal or if we need to hire more talent
  • We can increase revenue with a price increase and promote growth in our customer base through cross-selling, with little increase in investments

 

TAM SAM SOM Template Excel (PLUS PowerPoint Guide)

It's fair to say that plenty of SaaS providers ignore this step. Please don't.

This guide was made for you to learn how to run this process yourself.

It's not easy, but this guide makes it more accessible. To help you go one step further, we've created a template and a guide in Excel and PowerPoint.

Click below for your free Excel and PowerPoint TAM SAM SOM calculator, template, and guide.

 

Stay tuned for more advice in our SaaS marketing for leaders series of guides. If you need help, you can talk to me anytime here.

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