When evaluating market potential, businesses often rely on three key metrics: Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). These metrics help businesses understand their market size, allocate resources effectively, and set realistic forecast targets—especially critical for start-ups seeking to secure investor confidence.
Although TAM, SAM, and SOM are sometimes misunderstood or used interchangeably, each serves a distinct purpose in market analysis and strategic planning.
What Is TAM?
Total Addressable Market (TAM) represents the total market demand for a product or service if the company were to capture 100% of the market. It is the broadest measure of market potential and serves as an aspirational benchmark.
For example, if a company develops project management software, the TAM could encompass every business worldwide that might benefit from such tools. While TAM often yields an impressive figure, it does not account for practical limitations such as geographic constraints, competition, or product-market fit.
What Is SAM?
Serviceable Addressable Market (SAM) is the portion of TAM that a business can realistically serve, factoring in its product capabilities, geographic reach, and target customer demographics. This metric provides a more practical measure of the market size.
Continuing with the project management software example, SAM might focus on businesses within a specific region or industry where the software is most relevant. For instance, SAM could include medium-sized companies in North America that need tools to manage remote teams effectively.
What Is SOM?
Serviceable Obtainable Market (SOM) is the subset of SAM that a business can realistically capture within a specific timeframe, aligning closely with the company’s sales strategy and business plan. This metric ties directly to the business forecast and operational goals.
For the project management software, SOM might represent the businesses the company can reach through its current sales and marketing efforts, such as 10% of medium-sized companies in North America within the first two years of operation. By connecting SOM to the business forecast, companies can set actionable and achievable growth targets.
Key Takeaways
TAM, SAM, and SOM are vital metrics for understanding market potential and defining realistic growth opportunities. While TAM provides a high-level view of the total market, SAM narrows it down to what’s realistically addressable, and SOM pinpoints achievable targets within a given timeframe.
These metrics are especially important for businesses aiming to create realistic forecasts and financial targets. For start-ups without much historical financial data, these metrics are especially crucial to estimate both for internal purposes and to gain investor confidence.