How to calculate your market size using TAM, SAM and SOM

Market Sizing is an essential calculation for any business; it is much more than just putting a number to your market. When done right, it should inform key strategic decisions like product development, go-to-market strategies, distribution channels, revenue projections and marketing messages.

Market sizing accurately can provide incredible insight into your start-up’s potential scope and viability. This data is relevant to every stakeholder, you as a start-up owner, VCs and Investors, start-up incubators and accelerators, banks, and many others.

What Investors, Incubators, and Accelerators look for in market sizing data for a start-up

If your market size is too tiny, stakeholders could infer the business scope isn’t large enough, the market is too nascent, or there may not even be a demand for your product or service.

If the market is too big, stakeholders may wonder if the market is too saturated, the competition is too stiff, or the marketing dollars required are too high. 

Investors, Incubators, and Accelerators meet new companies and read many pitches daily. They have a keen, trained eye to spot a reasonable market size when they see one. So what is the best way to portray an optimistic but realistic market-size picture? 

The most popular and trusted method to extract and organize this data is through the TAM, SAM and SOM model.

What is TAM, SAM, and SOM for a business pitch

TAM: Total Addressable Market 
SAM: Serviceable Addressable Market
SOM: Serviceable Obtainable Market

This guide will walk you through these segments, methods to find contributing data, and how to calculate them.

What is the Total Addressable Market (TAM)?

TAM is an account of your maximum potential market. It reflects the value of the overall revenue opportunity available if 100% market share was attained. 

E.g., Global market sales of smartphones were 1.39 billion units in 2021.

The total Addressable Market is almost impossible to be covered by one company, but it does provide insight into the following to stakeholders:

  • Potential scalability
  • Market Stability
  • Maximum possible revenue
how to calculate your market size, what is TAM

How do I calculate my TAM?

TAM is calculated as a sum of the units sold within the industry, or you can also multiply the total units sold by the average cost to purchase. 

The global market sales of smartphones in 2021 was 1.39B, and the average selling price of a smartphone was US$317; the Total Addressable Market is 1.39B.

The first step to this calculation is identifying your industry accurately. 

For example, if you have built an app that helps edit photos better, you might try to look up the photography app industry as your TAM. But that would be wrong. You have to think bigger. Your total addressable market is anyone who owns a smartphone! 

Investors like to zoom out to this level to analyze your company’s future scope. A business could take many different directions in the future; you may add new products to the same market and open out the same product to other markets. It is always helpful to keep an eye on the bigger picture.

Since TAM does not consider other factors such as competition, distribution, and logistics, as a potential international entrepreneur, you can take on the world as your stage.

Where can I find data to calculate my TAM?

You can find a lot of secondary research with the numbers you need online. Trusted sources like Statista, Fortune Business Insights, Persistence Market Research, and Market Data Forecast have free data snapshots.

What is a Serviceable Addressable Market (SAM)?

SAM is an account of your sub-market. It points to a more specific, relevant and realistic portion of the TAM that would be willing to pay for your product or service. 

E.g., If your photo app helps make it easier for amateur photographers to shoot, edit and publish their content. You can start streamlining your market by targeting audiences that would have the willingness to pay for a product like yours. 

SAM helps stakeholders of a start-up understand

  • The medium-term potential for a business
  • The real target group
  • The start-up founders hold onto their market understanding.
how to calculate your market size, what is SAM

How do I calculate my SAM?

SAM is calculated as a sum of the units sold within your new streamlined target market, or you can also multiply the total units sold in this market by the average cost to purchase. 

E.g., The photo-editing app market size in 2022 is valued at US$293.44M. This includes home users, beginners, or hobbyists who prefer less complicated photo editing software like Google Snapseed and GIMP versus professional photographers who use Lightroom or Photoshop.

This market value compresses the initially recognized $437.46B Total Addressable Market to a more obtainable market based on your specific product. 

This is also the right time for start-up founders to eliminate markets based on regulations, financial limitations, geography, and culture.

Where can I find data to calculate my SAM?

Search for keywords using your target markets to find secondary research with the numbers you need online. Look at industry-specific resources like financial reports, industry analysis reports from companies like PWC, KPMG or academic institutions and their whitepapers or case studies. You can also refer to trusted sources like Statista, Fortune Business Insights, Persistence Market Research, and Market Data Forecast, which have snapshots of data available for free and more detailed reports for a price.

What is my Serviceable Obtainable Market (SOM)?

SOM represents a proportion of the SAM you are likely to serve realistically. This subset of your SAM takes into account a market reachable to you. 

E.g., You are based in Canada and found that North America has the largest market share for photo-editing apps with a whopping 35% contribution to the global market. You also found underserved segments within North America’s photo editing app market, believing your app solves this segment. This is your Serviceable Obtainable Market. 

how to calculate your market size, what is som, Serviceable Obtainable Market

SOM is a starting point, so it has to be as realistic as possible. It helps investors understand

  • Your immediate goals
  • Your potential revenue in the short term
  • The yardstick to track your progress

How do I calculate my SOM?

SOM is calculated as a sum of the units sold within your reachable market, or you can also multiply it by the total units sold in this market * average cost to purchase. 

E.g., You have marked your starting point as the North American market, specifically photo editing app users who are marketers and content creators. North America’s market share is 35% of global photo editing apps. You can use this benchmark to set goals for your potential market share in the short term. 

By the time you’re at this stage, the market size and value should have reached a more reasonable number. It should be backed by;

  • Your marketing channels, marketing dollars and their actual reach 
  • Your team size and technology backing
  • Competition’s existing market share

Where can I find data to calculate my SOM?

Look for primary and secondary data to help you decipher the right SOM. Interview experts from the industry, read articles, interviews and analysis on your competition. Find secondary research that is country or region specific.  For example, in Canada, you can find many curated Industry-specific trade news on websites like Fintech Times, Healthcan, Canadian Manufacturing and Canadian Food Business.

Market Sizing is not a one-time activity.

As your business grows, it is essential to keep returning to the market sizing exercise on all three levels. Start-Up Founders find that their markets evolve over time and can explore new markets and products to keep their brands relevant, sustainable and profitable.

Do you want to expand your business to North America?

Canada is an excellent starting point to start-up and scale your business overseas. The Canadian Government has many initiatives that help international entrepreneurs set up operations in the country. Government Designated Organizations like Toronto Business Development Centre (TBDC) have expert teams with mentors, funders and entrepreneurs to support your move. Contact us today to learn more about how they can help your start-up.

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