A Beginner’s Guide to TAM, SAM, and SOM
Learn TAM, SAM & SOM with simple examples. Discover how to calculate market size using top-down & bottom-up methods to impress investors.
Do you want to start a business? But don’t know “How Big is Your Market” that you could capture? You came across this blog at the perfect time to understand TAM, SAM, SOM. Congrats! You and your business will be getting just what you are looking for and this could help make better decisions.
Before you go & start pitching a Shark Tank Investor you might want to understand TAM, SAM and SOM. Sounds like a group of a trio, surely a friendly and helpful one.
Let’s understand What is TAM, SAM and SOM?
Imagine you are selling printed T-shirts, you want to know:
- How many people could ever want printed T-shirts?
- How many people could you realistically sell printed T-shirts to?
- And how many will you actually buy your printed T-shirts from you?
These three questions line up perfectly with:
TAM (Total Addressable Market) – That’s the total demand for your product & service in universe (If you had zero competition)
Example: If you’re starting a company that sells customized printed t-shirts, your TAM would be the total global market for all Apparel.
SAM (Serviceable Addressable Market) – That’s the “slice” of a pie called SAM, you could realistically serve with its current geographic location & target audience.
Example: Using printed t-shirts Business, your SAM might be the market for New Apparel Business in the US, focusing on specific price range/type (Personalized/ Customized printed T-shirts)
SOM (Serviceable Obtainable Market) – That’s the actual market you can realistically capture based on current resources & competition.
Example: With reference to the same example above, your SOM could be the market for New Apparel Business in New Jersey, focusing to capture 5% of the market of Personalized/ Customized printed T-shirts in the 1st year.
In short:
- TAM = Dream big (Global opportunities)
- SAM = Keep it real (Geographical reach)
- SOM = What’s on your plate right now (capturable with available resources)
How to Calculate TAM, SAM, and SOM?
There are two Calculation Methods
Calculation Methods
Top-Down Approach:
It’s simply calculated based on the estimated figures collected from the secondary data (any data that is available on the internet).
This method might include using market research data, industry reports, and other secondary sources to estimate the total market size and then applying various assumptions and filters to determine the SAM and SOM.
Advantages of the Top-Down Approach
- Provides a perspective to a broad market
- In comparison it’s easy and quick to execute
- It is useful for initial market assessment and high-level strategic planning
Limitations of the Top-Down Approach
- Secondary data could be outdated or inaccurate.
- This can lead to an overestimation of the potential market size.
Bottom-Down Approach:
It’s simply calculated based on the detailed analysis of company’s target market segments from the primary data (any data that is available with the company internally / real team).
This method might include using customer surveys, sales data, interviews to estimate the total market size and then applying various assumptions and filters to determine the TAM, SAM and SOM.
Advantages of the Top-Down Approach
- Provides a perspective to more detailed & real-time market estimation
- It considers competitive factors
- It is useful for setting real-time revenue targets & sales forecast.
Limitations of the Top-Down Approach
- Primary data could be time consuming
- Requires access to reliable sources of primary data
Let’s Take Customized Printed T-shirts Example Further to calculate TAM, SAM & SOM
Let’s say you’re starting a Customized Printed T-shirts brand in India.
1. TAM (Total Addressable Market):
Start by asking: How many people/organizations use customized printed t-shirts?
Let’s say the Global Apparel market is worth Rs.150 billion per year. That’s your TAM if you could somehow convince everyone to buy your Customized Printed T-shirts
Pro Tip: TAM isn’t just about people — it’s about total revenue opportunity.
2. SAM (Serviceable Available Market):
Next: How many people might realistically buy customized printed t-shirts?
Let’s say the customized printed t-shirts market in India is Rs.5 billion. That’s your SAM — the segment of the total market that aligns with your product.
3. SOM (Serviceable Obtainable Market):
Now, you ask: How many of those customized printed t-shirts buyers can I actually reach in Year 1?
You’re starting in Pune, doing local marketing, and you can realistically reach 0.5% of the SAM in your first year.
0.5% of Rs.5 billion = Rs.25 million
That’s your SOM — the market you can actually win with your current team, budget, and strategy.
Estimate your TAM
Select Industries
Select Regions
Select Revenue
Select Employee Sizes
Your Total Addressable Market Value
Top Matching Companies
| Company Name | Industry | Location | Revenue | Employees |
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How to Calculate TAM, SAM, and SOM
There are a couple of common ways to do it:
1. Top-Down Approach
Start with industry reports or stats (from Google & Assumption) and narrow down from there.
Example:
- TAM: Indian customized printed t shirt Apparel industry = Rs.300M (Assume 10% of global TAM = 3B * 10%, is Indian Market)
- SAM: Indian Customized printed t shirt Apparel = Rs.6M (2% of Indian market share is Pune = 300M * 2%)
- SOM: You aim to capture 3% of your city’s Rs.6M realistically capture = Rs.180,000
(Rs.6 million (SAM) x 3% (Realistic Market Share)
2. Bottom-Up Approach
Start with your pricing and expected sales volume. This is often more accurate (and convincing to investors).
Example:
- Price per Customized = Rs.300
- You can serve 50 customers/month = Rs.15,000/month
- That’s Rs.180,000/year = your initial SOM
Build your SAM and TAM by scaling up from there.
Common Mistakes to Avoid
Alright, now that you’re a TAM/SAM/SOM wizard in training, here are some rookie mistakes to avoid:
- Overestimating TAM to Impress Investors
“We’re in a $500 billion (about $1,500 per person in the US) market, so even if we get 0.001%…”
That math might work in theory, but it makes you sound like you’re not grounded.
Instead: Show understanding of the space and how your SOM fits within it.
- Confusing TAM, SAM, and SOM
They are NOT interchangeable. TAM is NOT what you’ll make next year.
Remember:
- TAM = total universe
- SAM = slice you can serve
- SOM = bite you can chew
- Ignoring the Bottom-Up Method
Top-down is easy, but bottom-up shows you’ve done your homework and thought through execution.
- Not Updating Your Numbers
Markets change. Your opportunities grow. Keep your TAM/SAM/SOM dynamic — not frozen in your pitch forever.
Final Thoughts: Know Your Size Before You Take a Bite
Understanding TAM, SAM, and SOM isn’t just a box to check for investors — it’s about YOU knowing where your business fits in the world.
These metrics help you:
- Set realistic goals
- Prioritize resources
- Impress investors
- Sleep better at night
FAQ
1.Why do investors care so much about TAM, SAM, and SOM?
Answer – Investors use these metrics to gauge a business’s growth potential and how realistic its strategy is, helping them decide if it’s worth their money.
2. Which calculation method is better: Top-Down or Bottom-Up?
Answer – While the top-down method is quick for a high-level view, the bottom-up approach is generally considered better because it provides a more accurate, data-driven, and defensible estimate for your business.
