How to work out your market opportunity: TAM, SAM and SOM.

Market size tells investors whether a business could become big enough to matter. It also tells you whether the opportunity is worth years of your life. The numbers only convince people if they can see how you got them.

The three numbers

• TAM (total addressable market). Total revenue if every possible customer, everywhere, bought your product.
• SAM (serviceable available market). The part of the TAM you can actually reach with your product, channels and geography today.
• SOM (serviceable obtainable market). The share of the SAM you can realistically win in the next three to five years.

Top-down or bottom-up

Top-down starts from a big industry figure and takes a percentage. It is quick, but it tells investors nothing about whether you can win customers. Bottom-up starts from the number of customers you can reach and what each pays. Always lead with bottom-up.

Bottom-up, step by step

1. Define the customer precisely. From your ideal customer profile: type, size, location.
2. Count them. Use public data: Companies House, ONS business counts, trade associations, membership bodies, regulators’ registers.
3. Set the annual value per customer. Use your real price, or a price customers have agreed to in pilots.
4. Multiply. Number of customers × annual value = market size.
5. Work out SOM from your sales capacity. How many customers can your team and channels realistically win each year? That is your obtainable market, not a percentage you hope for.

Worked example (illustrative figures)

A practice management tool for independent veterinary practices:

• TAM: about 25,000 vet practices in Europe × £3,600 a year = about £90m.
• SAM: about 5,000 independent practices in the UK you can sell to today × £3,600 = about £18m.
• SOM: two salespeople each winning 5 practices a month, with some churn, gives roughly 300 practices in three years × £3,600 = about £1.1m ARR.

The SOM is small next to the TAM, and that is what makes it believable. Investors then ask how you grow from SAM towards TAM: new countries, new products, larger customers.

Common mistakes

• “If we get just 1% of the market…”. It shows you have not worked out how to win the first customer.
• Using the whole industry’s revenue as your TAM, rather than spending on the problem you solve.
• No sources. Cite where every number comes from.