When you launch a new SaaS, one of the first questions you ask yourself is: How big is the market I can reach? Or better yet: How much money is on the table that I can grab? This is where TAM, SAM and SOM come in. It may sound like some complicated marketing term, but it’s actually quite simple.
In this article, I’ll show you how to use these three steps to get a clear picture of your market potential using a concrete example.
What is TAM, SAM and SOM?
TAM: Total Addressable Market
TAM, or Total Addressable Market, is the total demand for a product or service if you were to serve all possible customers in a given market.
It is a broad term that represents the full size of the market, regardless of the limitations of your particular business or product.
SAM: Serviceable Available Market
SAM, or Serviceable Available Market, is the portion of the TAM that you can actually serve based on your product, target market and resources. It takes into account factors such as geographic constraints, competition and the specifics of your offering.
SAM thus provides a more realistic picture of the market you can serve.
SOM: Serviceable Obtainable Market
SOM, or Serviceable Obtainable Market, is the portion of the SAM that you can realistically capture taking into account competition, budget and time frame. This concept helps you set your sales goals and focus your marketing efforts.
SOM takes into account the competition, your sales capabilities and other factors that affect your market share.
Sample TAM, SAM, SOM calculation: Project Management SaaS for SMEs
Step 1: Calculate the TAM
Suppose you offer a project management SaaS and it is suitable for all companies worldwide that use project management tools.
- There are 359 million companies worldwide (source: Statista).
- Suppose 25% of those companies need project management tools (think companies with project teams, freelancers and consultants). This means that the TAM = 25% × 359 million = 89.75 million companies.
- Average price of your subscription: €20 per user per month, with an average of 5 users per company.
- Annual revenue potential per company = €20 × 5 × 12 = €1,200.
TAM = 89.75 million businesses × €1,200 = €107.7 billion.
Step 2: Calculate the SAM
Because your SaaS targets small and medium-sized businesses (SMBs), you are limiting the market:
- According to statistics, about 60% of all companies worldwide are SMBs.
- This means that your SAM targets 60% of the TAM:
- SAM = 60% × 89.75 million = 53.85 million companies.
- Annual revenue potential per SME remains the same (€1,200 per company).
SAM = 53.85 million firms × €1,200 = €64.62 billion.
Step 3: Calculate the SOM
Now look at your own capabilities, such as:
- You have a limited marketing budget and in the initial phase focus only on the European market.
- For example, there are 26 million SMEs in Europe (source: Eurostat).
- Suppose you can get 1% market share in the next 3 years.
- 1% of 26 million companies = 2.6 million companies.
- Annual sales potential per company = €1,200.
SOM = 2.6 million firms × €1,200 = €3.12 billion.
Summary calculation
- TAM: €107.7 billion (all companies worldwide).
- SAM: €64.62 billion (global SMEs, 60% of TAM).
- SOM: €3.12 billion (1% of European SMEs in 3 years).
The Importance of TAM, SAM and SOM in B2B Marketing and Sales
Understanding and applying TAM, SAM and SOM is essential to your B2B marketing and sales strategies. Here are some reasons why these concepts are important:
1. Market segmentation
By analyzing TAM, SAM and SOM, you can segment your market and become more targeted. This helps you identify the most promising customer segments and optimize your marketing efforts.
2. Resource allocation
Understanding these markets allows you to allocate your resources more effectively. By identifying the SOM, you know where the biggest opportunities lie and can better manage your budgets and time.
3. Strategic planning.
These concepts will help you formulate a strategic plan. By knowing what the overall market is (TAM), what you can serve (SAM) and what you can capture (SOM), you can set realistic goals and develop strategies to achieve them.
4. Investment decisions
Investors and stakeholders often want to know the growth potential of your business. TAM, SAM and SOM provide a clear overview of market potential and help you justify investments.
5. Competitive analysis
Knowing the TAM and SAM helps you understand your competitive position. By analyzing who the competitors are and where they are within these markets, you can better align your own strategies.
How to Calculate TAM, SAM and SOM
Calculation of TAM
You can calculate TAM in several ways, depending on the data available and the specific market. A common method is the top-down approach, where you start with the total sales of an industry and then depreciate it for non-relevant segments.
An alternative approach is the bottom-up method, where you start with the number of potential customers and average sales per customer.
Calculating SAM
To calculate SAM, you need to refine the TAM based on specific criteria relevant to your business. This may include looking at geographic areas, company size, industries and other demographics.
The SAM can also be calculated using market research and competitor analysis.
Calculation of SOM
SOM is often estimated using historical data, market research and sales forecasts. This may involve looking at your current market share, the growth rate of the market and the expected impact of marketing and sales efforts.
Be realistic when estimating SOM to avoid disappointment.
Conclusion
TAM, SAM and SOM are essential concepts in B2B marketing and sales that help you understand your market opportunities and effectively plan for growth. Applying these concepts will help you be more focused, use your resources more effectively and make strategic decisions that lead to success.
Understanding these terms is useful not only for marketing and sales professionals, but also for management and investors looking to assess a company’s growth potential. Thorough analysis of TAM, SAM and SOM will help you position yourself for long-term success in an increasingly competitive marketplace.