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Figuring out the size of your market can feel like a daunting task, but it’s essential if you want to build a successful business. Investors care about it, your business strategy depends on it, and it can help you set realistic growth goals. That’s where TAM, SAM, and SOM come in. These terms might sound technical, but they’re really just tools to help you answer some simple but critical questions:
Let’s say you’re launching a new food delivery app. The TAM might be the entire global food delivery industry, which is worth around $150 billion. Your SAM could be just the market for food delivery in urban areas of the U.S., narrowing it down to roughly $30 billion. But if you’re a startup operating only in New York City, your SOM might be a more realistic slice, say $500 million based on local demand and competition.
In this blog, we’ll break down exactly how to calculate these numbers so you can confidently talk about the market sizing for funding and, more importantly, make informed decisions about where to focus your efforts.
Market sizing for funding is all about figuring out how big the potential demand is for your product or service. It’s like asking, “How many people out there might actually want what I’m selling, and how much could I make from them?”
It’s a crucial step for any business, whether you’re pitching to investors, deciding where to expand, or just trying to set realistic sales goals. When you know the size of your market, you can estimate how much money you could potentially make, how much of that market you could realistically reach, and how to focus your efforts to get there.
In short, market sizing gives you a clear picture of the opportunity ahead and helps you plan your business strategies accordingly. It’s like having a map before you start the journey without it, you’re just guessing.
TAM, SAM, and SOM are terms that help you understand the size of your market and where your business fits in.
TAM stands for Total Addressable Market. This is the biggest possible market for your product or service. Think of it as everyone in the world who could potentially use what you’re selling, with no limitations. It’s the dream scenario, but usually unrealistic to capture all of it.
SAM stands for Serviceable Available Market. This is the portion of the market that your business can actually serve. It’s more specific and realistic than TAM. Maybe your product only works in certain regions or is tailored to a specific type of customer that’s your SAM.
SOM stands for Serviceable Obtainable Market. This is the slice of SAM that you can realistically capture in the near future. It’s the number that reflects what you can actually achieve based on your current resources, competition, and market conditions.
So, in simple terms: TAM is the total potential, SAM is what you can reach, and SOM is what you can actually get.
TAM, SAM, and SOM are important because they help you get a clear picture of your business’s potential and guide your decisions.
TAM shows you the total market size—basically, how big the opportunity is if everything goes perfectly.
SAM narrows it down to what’s realistic for your business, considering things like geography, your target audience, and your product’s limitations.
SOM is where it really gets practical—it’s the market share you can actually aim for, given your resources, competition, and current stage.
Knowing these numbers is crucial for several reasons:
Investors want to know if the market is big enough and if you have a realistic plan to capture a slice of it. Without this, it’s hard to convince them that your business has growth potential.
TAM, SAM, and SOM help you focus on where you should spend your time and resources. You might have a huge TAM, but your SOM tells you where to start small and grow from there.
These numbers help you set more realistic sales and growth targets, so you’re not aiming for the stars without a rocket.
Related: Guide to Getting Pre-Seed Funding
Calculating TAM, SAM, and SOM might sound complicated, but it’s actually just a process of breaking down the market into more manageable and realistic pieces.
TAM is the total demand for your product or service if there are no limits. To calculate it, think of the entire market that could possibly need what you’re offering. You can use a couple of approaches:
Top-Down Approach: Look at industry reports or market research data. For example, if you’re selling fitness trackers, find out the global market size for wearable tech, say it’s $50 billion.
Bottom-Up Approach: Estimate based on the number of potential customers and the price of your product. If you think there are 1 million people who would pay $100 for your tracker, your TAM would be $100 million.
Now, narrow it down to the specific part of the market your business can actually serve. Maybe you only sell in certain regions or your product is targeted at a specific group of people.
If you’re only selling fitness trackers in the U.S., your SAM would be the U.S. market for wearable tech, which might be $10 billion instead of the global $50 billion.
Another way to calculate it is by targeting a specific customer base. For example, if your fitness trackers are made for runners, you’d focus on the percentage of that $10 billion market that is just runners.
This is the part that’s most realistic for you to achieve right now. It’s your slice of the SAM that you can capture, considering competition and your current resources.
Look at your sales goals, marketing budget, and competition. Maybe you can realistically grab 1% of the U.S. market in the next year. That means your SOM would be $100 million (1% of $10 billion SAM).
In short:
By breaking it down this way, you can focus your efforts on what’s achievable while keeping an eye on long-term potential.
When it comes to market size for funding, it’s easy to make mistakes that can throw off your business plans or make you look unprepared in front of investors. Here are some common mistakes people make and how you can avoid them:
It’s tempting to think your product could serve everyone, but overestimating your TAM can lead to unrealistic expectations. Saying, “This product is for everyone” might sound exciting, but it’s rarely true.
How to avoid it: Be specific. Break down the TAM based on actual, realistic data. Don’t assume everyone in the world will buy your product—focus on those who truly need it.
Even if you’ve done a great job defining your market, if you don’t consider competitors, your SOM could be way off. Competition eats into your obtainable market, so you need to be honest about your chances.
How to avoid it: Research your competitors and figure out what portion of the market they already control. Use that to adjust your SOM, making it more realistic.
The market changes quickly, and using old data can lead you to inaccurate estimates. If your data is from a few years ago, it may no longer reflect current trends, consumer behavior, or market conditions.
How to avoid it: Make sure your data is up-to-date. If you’re using industry reports, check the publication date. If you’re using customer estimates, do fresh research.
A common mistake in calculating SOM is assuming you’ll capture a huge chunk of the market, especially as a new player. It’s easy to fall into the trap of thinking, “We’ll get 20% of this market next year!” But in reality, capturing even 1% can be challenging.
How to avoid it: Be realistic. Start small and account for the time it takes to build brand awareness and customer trust. It’s better to underpromise and overdeliver.
Many businesses fail to break down their market into segments like geography, demographics, or customer needs. This leads to overgeneralized market sizing that doesn’t reflect your actual target customers.
How to avoid it: Segment your market. Identify specific groups within your TAM or SAM, and focus on who is most likely to buy your product. This gives you a clearer view of your SOM and how to approach different market segments.
Using only top-down approaches, like general industry reports, can give you an inflated sense of market size. It’s important to do bottom-up calculations as well, based on actual customer data or sales forecasts.
How to avoid it: Combine both top-down and bottom-up approaches. Look at overall market data, but also do the math on how many customers you could realistically reach based on your product price, distribution channels, and marketing efforts.
Market sizing data isn’t just a bunch of numbers to impress investors—it’s a crucial tool for shaping your business strategy. When you understand the size of your market, you can make smarter decisions about where to focus your efforts, how to grow, and what goals are achievable. Here’s how you can use market sizing data to drive your strategy:
Market sizing data helps you zoom in on the specific groups most likely to buy your product. Instead of trying to appeal to everyone, you can focus on the segments that will give you the best return on investment (ROI). For example, if your Serviceable Available Market (SAM) shows that your product is particularly appealing to young professionals in urban areas, you can tailor your marketing efforts and product features to meet their needs.
Your Serviceable Obtainable Market (SOM) gives you a clear idea of what’s achievable. Instead of setting sky-high sales goals that are impossible to reach, you can base your targets on real, data-backed market estimates. This helps you avoid overcommitting resources and keeps your team focused on what’s truly possible.
Knowing your SOM allows you to decide where to put your time, money, and energy. If you know you can realistically capture 5% of a $1 billion market, you can budget appropriately for marketing, product development, and customer acquisition. Market sizing ensures you’re not spreading yourself too thin across markets that won’t yield the results you need.
Market sizing data can also guide your entry into new markets. If your TAM indicates that a certain region or customer segment is huge, but your SOM shows that competition is fierce, you might reconsider entering that space or at least adjust your approach. On the flip side, if you find an underserved niche with significant potential, you can jump in and make a big impact.
Investors want to know the size of the opportunity before they commit money to your business. Having solid TAM, SAM, and SOM calculations shows them that you’ve done your homework and that your growth projections are based on more than just wishful thinking. It gives them confidence that there’s room for your business to thrive, and that you have a clear strategy to capture market share.
As you scale, market sizing helps you identify new opportunities. Maybe you’ve captured 5% of your initial SOM—what’s next? By regularly revisiting your market sizing data, you can spot new segments to target, or regions where you can expand. It’s like having a roadmap that evolves with your business.
Getting a handle on TAM, SAM, and SOM is essential for any business trying to make its mark. These metrics give you a clear view of your market’s potential and help shape your overall strategy. By understanding these numbers, you can focus on the right audience, set achievable goals, and use your resources wisely.
Remember, the market is always changing, so don’t hesitate to revisit your calculations regularly. Staying on top of this data allows you to adapt and make smart decisions as you grow. In the end, using market sizing effectively can set you up for lasting success and help you navigate the challenges ahead with confidence.
If you’re a startup seeking financing for your next steps as a company, come pitch your idea.
Eximius Capital Ventures Private Limited is the investment manager of the funds licensed by SEBI under AIF categories CAT I – Eximius Trust I (IN/AIF1/20-21/0855) and CAT II – Eximius Fund (IN/AIF2/24-25/1566).
Eximius Capital Ventures Private Limited is the investment manager of the funds licensed by SEBI under AIF categories CAT I – Eximius Trust I (IN/AIF1/20-21/0855) and CAT II – Eximius Fund (IN/AIF2/24-25/1566).
