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1. Targeting

What is total addressable market (TAM)?

Total addressable market (TAM) is the yearly revenue you would earn if every company that fits your product became a customer. It is an upper bound that tells you whether a market is big enough to be worth entering, not a forecast of what you will sell.

The formula

TAM formula

TAM = number of fitting companies x yearly revenue per customer

SAM = TAM x share you can serve

SOM = SAM x share you can win

The parts

  1. Companies that fitThe count of companies that match your ideal customer profile. Start from a public count by industry and size, then narrow it.
  2. Yearly revenue per customerWhat one customer pays you in a year. Use your real price, not a hoped-for one.
  3. Serviceable market (SAM)The part of the TAM you can actually serve today, given your product, region and sales reach.
  4. Obtainable market (SOM)The part of the SAM you can realistically win in the near term against other options.

Worked example: Routewise, route planning for HVAC service fleets

Routewise is a made-up company. It counts the companies that fit, multiplies by its yearly price, then narrows to the part it can serve and win. The same arithmetic runs in our market size calculator.

By hand

  1. Companies that fit: 18,400. Yearly revenue per customer: $4,800.
  2. TAM = 18,400 x $4,800 = $88.32 million.
  3. Routewise can serve 35% of those companies today: SAM = $88.32 million x 35% = $30.91 million, which is 6,440 accounts.
  4. It expects to win 4% of that: SOM = $30.91 million x 4% = $1.24 million, which is 258 accounts.
TAM, $88.32 million100%
SAM, $30.91 million35%
SOM, $1.24 million1.4%

TAM, SAM and SOM as a share of the TAM

How to apply it

  1. Write down your ideal customer profile so you know which companies count.
  2. Count the companies that match it. The US Census Bureau's County Business Patterns series is one place to count establishments by industry and employment size.
  3. Multiply the count by what one customer pays you in a year to get the TAM, then apply your serve and win shares for SAM and SOM.
  4. Compare the SOM to your revenue goal and use it to decide how big a prospect list you need.

Mistakes to avoid

  • Counting every company in an industry instead of only those that match the profile, which inflates the number.
  • Using a top-down figure from a report without checking it against a company count you can list.
  • Treating the TAM as a sales forecast when it is only an upper limit.

Ideal customer profile

An ideal customer profile (ICP) is a written description of the type of company that gets the most value from what you sell and is easiest to win and keep.

Read more

Firmographics

Firmographics are the facts that describe a company, such as its industry, number of employees, revenue band, location and age.

Read more

Questions

How do TAM, SAM and SOM differ?
TAM counts everyone who could buy something like your product. SAM narrows that to the buyers your current offer and channels can actually reach. SOM is the slice of SAM you can expect to win in the near term.
Where can I count companies by industry and size?
The US Census Bureau's County Business Patterns page describes an annual series with the number of establishments by industry and employment size. Read the page for the coverage and the definitions it uses.
Is a bigger TAM always better?
No. A large TAM that you cannot reach or serve does not help. The serviceable and obtainable parts matter more for planning outreach.
Should the TAM be in dollars or companies?
Track both. The company count sizes your prospect list and the dollar figure sizes the opportunity.

Sources

Tell us what you sell and who buys it

What you sell

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