TAM SAM SOM: The Meaning Behind the Metrics

Joy Fairbanks
4 min readFeb 10, 2021

Guidance for founders and investors evaluating market opportunities.

There are three tiers of scale commonly used to calculate the market opportunity for a startup’s product or service offering: TAM, SAM, and SOM. These are acronyms for Total Addressable Market, Serviceable Available Market, and Serviceable Obtainable Market. The purpose of these market assessments is to determine not what is, but what could be.

Founders, you may be struggling with calculating and interpreting these familiar concentric circles. Let’s begin with the understanding investors would like to derive from them.

What investors seek. Investors are looking for your insight and applicability. What are the key trends to justify your estimates and action now? What type of a market are we talking about? What is the competitive landscape? Is this a billion dollar opportunity?

State your market type. Market type drives your TAM. There are three market types: existing, re-segmented, and new. Launching into an existing market involves luring customers from existing competitors with better features, service, or pricing. Re-segmenting a market entails luring customers from adjacent markets by satisfying unmet needs. Creating a new market requires educating a new class of customer on an innovative offering. The type of market affects the cost of market entry, the sales cycle length, the adoption rate, the time to profitability, and the cash you burn. Investors need to know this.

Estimate need. Size the opportunity fit. This differs from using existing data for current products and services in a general category. It requires honing in on the customer’s pain point your offering targets but may not entirely serve. Uber did not get a billion dollar valuation by presenting a TAM that was too large and unwieldy (the all-inclusive global transportation market) or one too narrow and short-sighted (the existing ride hailing market). The relevant TAM represents a specific need: people needing to get from point A to point B on demand (and locally) without driving themselves. (Yes, a separate TAM should be calculated for the need to move “stuff” from point A to point B locally for UberEats, etc.). Estimating market size by need is more conducive to assessing innovation potential and new customer segments than by predicting it on existing products and services.

Admittedly, the founders of Uber did not use this approach initially. Upon reflection, Uber increased its preliminary estimate of the $4 billion ride hailing TAM to $300 billion based on its re-segmented marketplace (accounting for customers “outside of the box” of preexisting ride hailing TAM estimates). At first, Uber made a market size estimation error typical of founders. Uber did not initially leverage its own operating data and customer insights that suggested a much larger market opportunity from a re-segmented market. They forecasted top-down. This is a quick way to get numbers, but those numbers can be way off for new markets at home and abroad.

Calculate bottom-up vs. top-down. Estimating TAM top-down typically means using other people’s industry research of defined marketplaces. A bottom-up calculation leverages your customer insight and data. Your customer discovery, your pilots, and your sales will give you better insights not only on what you can achieve, but also about the market that is out there for everybody else in the game. What are your customers (existing and potential) telling you about their pain points and how they want them alleviated? What are you observing from their behavior? How do you choose to serve them?

SAM and SOM. The Serviceable Available Market (SAM) represents the marketplace more directly applicable to your offering, a subset of TAM, if you had a 100% share. SAM is the opportunity for everyone that could serve this market need with a similar offering. For example, if TAM represents the marketplace for those needing a good cup of Joe, SAM could be the market for those seeking a good cup of sustainably sourced coffee. Next is the Serviceable Obtainable Market (SOM). This is what your startup has a shot of getting within 2–5 years of a product launch. It is not your 10-year objective. It could be the on-line market opportunity for sustainably sourced coffee.

LAM. I advise founders to estimate their Launch Available Market (LAM) in addition to TAM/SAM/SOM. LAM is also known as the beachhead market estimate. It represents what you are going after first. Your target may be a regional or demographic segment of potential users. You calculate LAM from estimated (then actual) conversion rates of your customer acquisition activities. This is the realization of your go-to-market strategy- your plan to access, convert, and keep customers. How will you go viral? How soon and to what effect? These expectations guide the step up from LAM to SOM.

Show your assumptions. Present units, currency, and cite sources when calculating market estimates and trends. Your bottom-up approach for calculating LAM is the same one you use for forecasting your revenues. If you are still forecasting your revenues by estimating market share of TAM or SAM, think again. Data from your customer discovery drives your revenue model.

TAM/SAM/SOM and LAM are valuable metrics when calculated directly from the insight investors seek from you.

Joy Fairbanks evaluates early stage startups, advises founders, and creates programming for startup incubators and accelerators globally. She writes about startup success at FairbanksVentureAdvisors.com.

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Joy Fairbanks

Joy Fairbanks evaluates early stage startups, advises founders, and creates programming for startup incubators and accelerators globally.