Framework library · Competitive and market analysis
TAM, SAM and SOM
TAM is the total annual spend on the problem you solve; SAM is the part your offer, geography and channels can reach; SOM is the share of that you can win in a set period. Top-down figures are easy to inflate, so the step that makes the sizing credible is the bottom-up check: what your sales capacity could actually deliver over the same period.
Use it when
- You are deciding whether a market is large enough to enter, or which of two markets to enter first.
- A business plan or investment case needs a market size that will survive questions.
- Sales targets are being set and need a ceiling based on what can actually be won.
Avoid it when
- The market does not exist yet and customers cannot say what they would spend. Size it from comparable markets and test demand directly, with a minimum viable product or a priced pilot.
- You need to choose between segments. Size is one input. Use STP to weigh it against your ability to win.
- The figure is wanted to impress rather than to plan. A large TAM with no route to the SOM convinces nobody who checks.
How to run it
Define the customer unit and the spend
Choose the unit (homes, sites, buildings, firms) and what one spends a year on the problem you solve, including what it spends on alternatives today.
Work out TAM from the top down
Number of units in the market times annual spend per unit. Write the source of each figure beside it.
Narrow it to SAM
The share of TAM your offer, geography, channels and regulation let you serve today. Leave out what you could not deliver even if the customer said yes.
Estimate SOM for a set period
The share of SAM you can win in, say, five years, given competitors and how quickly customers switch. Compare it with what others have achieved in similar markets.
Check SOM from the bottom up
Sales staff times customers won per person per year times years. If the two answers differ by more than a fifth or so, find the assumption that is wrong.
Write the assumptions beside the numbers
Every figure is an estimate. The inputs that move the answer most are usually the obtainable share and the spend per unit. Test both.
Work through it
Answer the questions below, or load the worked example to see a finished one. The drawing updates as you type. Export the result as a PowerPoint deck, a Word document, an Excel workbook, a PDF or plain text.
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Mistakes to avoid
- Quoting a TAM from an industry report that defines the market differently from what you sell.
- Taking 1% of a large TAM as the SOM. It sounds modest but has no basis. Build SOM from sales capacity and win rates.
- Using list price as the spend per unit when customers pay less, or when much of their spend goes to things you do not sell.
- Mixing one-off and annual revenue in the same figure.
Where it comes from
No single originator. Nesting a total, a serviceable and an obtainable market is a convention of business planning and investment analysis rather than a published model, and definitions vary in detail from one source to another. Source.
Use it with
Further reading
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