You're pitching your startup and the VC asks: "What's your TAM?" If you answer "the global SaaS market is 500 billion", you just lost the deal. This guide will teach you how to calculate your TAM, SAM and SOM like a pro — with the right methods, not BS.
📌 What you'll learn:
- ✅ Exact definitions of TAM, SAM and SOM
- ✅ 2 calculation methods: Top-Down vs Bottom-Up
- ✅ Real examples with formulas
- ✅ Mistakes that make VCs laugh
- ✅ How to present market sizing in your pitch
What is TAM, SAM and SOM?
TAM SAM SOM is a market sizing framework born in the Venture Capital world. It answers ONE question: "What's the real size of your opportunity?"
TAM
Total Addressable Market
The TOTAL market if you had 100% market share, zero competitors.
= The absolute dream
SAM
Serviceable Addressable Market
The portion of TAM you CAN actually serve with your current product.
= The realistic
SOM
Serviceable Obtainable Market
The share of SAM you can CAPTURE in the next 1-3 years.
= The target
"Don't be tempted to resort to hand waving, meaning don't quote something you've heard and not verified as realistic."
— Marjorie Radlo-Zandi, Angel Investor
Why VCs Love TAM SAM SOM
According to GoingVC, investors use this framework for 3 reasons:
1. 📊 Evaluate Return Potential
A Seed VC wants 100x return. If your TAM is $50M, even with 10% market share you make $5M revenue. Not enough for a unicorn.
2. 🎯 Test Your Market Understanding
42% of startups fail because they build a product with no market (CB Insights 2024). TAM/SAM/SOM shows you've done your homework.
3. 📈 Validate Your Go-to-Market Strategy
SOM reveals your strategy: "I'm targeting tech SMBs in the US first" is more credible than "I'm going after the global market".
🚨 Eye-opening stat
A survey of 30 VCs found that many investors themselves struggle to clearly define TAM, SAM and SOM. So if YOU master it, you stand out.
Method 1: Top-Down (General to Specific)
The top-down method starts from macro market data and filters down to your target segment.
// Example: Project Management SaaS for SMBs
// Step 1: TAM (global market)
Global Project Management Software market: $7.3B
(Source: Grand View Research 2024)
// Step 2: SAM (serviceable portion)
You target: North America only (35% of market)
You target: SMBs 10-250 employees (40% of segment)
SAM = $7.3B × 35% × 40% = $1.02B
// Step 3: SOM (realistic 3-year capture)
You aim for: California only in Y1-Y3
Realistic market share: 0.5%
SOM = $1.02B × 12% (California) × 0.5% = $612K
⚠️ Top-Down Limitations
This method is fast but less credible to VCs. It relies on assumptions (% market share) that are hard to defend.
Method 2: Bottom-Up (Specific to General)
The bottom-up method starts from real data: your price, potential customers, sales capacity. This is what VCs prefer.
"A bottom-up build of future revenue is more useful than basing SOM on a hypothetical % share of TAM or SAM."
— A Series A VC (via Sona)
// Example: SaaS for Freelance Recruiters
// Base data
Number of freelance recruiters in the US: 45,000
Your price: $49/month = $588/year
// TAM Calculation
TAM = 45,000 recruiters × $588 = $26.5M
// SAM Calculation (those matching your ICP)
Filter: already use a CRM (60%)
Filter: tech-savvy, pay for tools (50%)
SAM = 45,000 × 60% × 50% × $588 = $7.94M
// SOM Calculation (realistic year 1-3)
Target: 500 paying customers in Y3
SOM = 500 × $588 = $294K ARR
💡 Why Bottom-Up Wins
You can DEFEND every assumption: "I found 45,000 recruiters on LinkedIn", "My beta conversion rate is 5%", etc. It's concrete, not "we'll take 1% of the global market".
The Calculation Formulas
TAM Formula
// TAM = Number of potential customers × Average revenue per customer
TAM = Total target companies × Annual ARPU
// Example: B2B SaaS for SMBs
359 million companies worldwide
25% use project management tools
Average price: $20/user × 5 users × 12 months = $1,200/year
TAM = 89.75M companies × $1,200 = $107.7B
SAM Formula
// SAM = TAM × Geographic filters × Product filters
SAM = TAM × % of your serviceable segment
// Example: you only target SMBs
60% of companies are SMBs
SAM = 89.75M × 60% × $1,200 = $64.6B
SOM Formula
// SOM = SAM × Realistic market share (1-3 years)
SOM = Target customers × ARPU
// Realistic approach
Y3 Target: 1,000 paying customers
ARPU: $1,200/year
SOM = 1,000 × $1,200 = $1.2M ARR
Benchmarks: What % of SAM for SOM?
What share of SAM can you realistically capture?
| Year | % of SAM (new product) | Context |
|---|---|---|
| Year 1 | 0.1% - 0.5% | Early adopters only |
| Year 2 | 0.5% - 2% | PMF achieved, organic growth |
| Year 3 | 1% - 5% | Post-Seed, paid acquisition |
| Year 5+ | 5% - 15% | Established leader in segment |
🚨 The Fatal Mistake
Saying "We'll capture 10% of the market in year 1" is an immediate red flag. Initial adoption rates are more like 0.5% to 2%, increasing as PMF improves (Source: Data-Mania).
Complete Example: E-commerce Analytics SaaS
Let's take a concrete example for a B2B SaaS startup targeting e-commerce stores.
📊 Context
- • Product: Analytics dashboard for Shopify
- • Price: $99/month = $1,188/year
- • Target: Shopify stores in North America
🌍 TAM (Total Market)
How many Shopify stores worldwide?
Active Shopify stores: 4.5 million
ARPU: $1,188/year
TAM = 4.5M × $1,188 = $5.35B
🎯 SAM (Serviceable Market)
Stores you can ACTUALLY serve?
Filter North America: 35% of stores = 1.575M
Filter Revenue > $100K/year: 20% = 315,000
Filter tech-savvy (uses apps): 60% = 189,000
SAM = 189,000 × $1,188 = $225M
💰 SOM (Obtainable Market)
How many customers in 3 years?
Year 1: 200 customers (early adopters)
Year 2: 800 customers (post-PMF)
Year 3: 2,500 customers (post-Seed)
SOM Y3 = 2,500 × $1,188 = $2.97M ARR
That's 1.3% of SAM in Y3 — credible ✅
5 Mistakes That Make VCs Laugh
❌ Mistake #1: The "made up" TAM
"The global SaaS market is $500 billion." Cool, but what does that have to do with your inventory management tool?
Fix: Use verifiable sources (Statista, Gartner, IBISWorld).
❌ Mistake #2: "We'll capture 10% of the market"
If your TAM is $10B, that's $1B in revenue. You just predicted you'll be a unicorn in 3 years. Really?
Fix: SOM = 0.5-2% max in Year 1-3.
❌ Mistake #3: Confusing TAM and SAM
"Our TAM is all US SMBs." No, that's your SAM. Your TAM is all SMBs worldwide (if your product has no geo limits).
Fix: TAM = no filters. SAM = with your constraints.
❌ Mistake #4: No sources
"The market is 460K potential customers." Where did that come from? If you don't cite your source, the VC assumes you made it up.
Fix: "460K tech SMBs in US (Census Bureau 2024)".
❌ Mistake #5: Top-Down only
You take a big number and divide by percentages. The VC sees you've never counted your potential customers one by one.
Fix: Do BOTH. If they converge (±15%), you're credible.
Where to Find the Data
| Source | Best for | Cost |
|---|---|---|
| Statista | Market overviews, forecasts | Freemium / $599/year |
| IBISWorld | Detailed industry reports | Premium (~$1K/report) |
| Gartner | Tech, SaaS, Enterprise | Premium (expensive) |
| US Census Bureau | US business data (SMBs, employment) | Free |
| Crunchbase | Competitive analysis | Freemium / $49/month |
| LinkedIn Sales Navigator | Bottom-up target counting | $79/month |
How to Present TAM SAM SOM in Your Pitch
The "Market Size" slide is usually 3rd or 4th in your deck. Here's how to structure it:
📊 Market Size Slide Template
$5.3B
TAM
Shopify stores globally
$225M
SAM
North America, Rev>$100K
$3M
SOM (Y3)
2,500 customers
Sources: Shopify Q3 2024, Statista, Internal analysis
💡 Pro Tips for the Pitch
- • Cite your sources on the slide (small text at bottom)
- • Explain your SAM filters in 1 sentence ("North America, Rev>$100K")
- • Justify your SOM by your current conversion rate or sales capacity
- • Show market growth (CAGR) if it's > 10%
FAQ: Common Questions
What's the minimum TAM for a Seed round?
Seed VCs typically look for a TAM of $1B+ minimum to have unicorn potential. Below that, the deal isn't interesting enough for VC.
Top-Down or Bottom-Up?
Do BOTH. If results are close (±15%), your assumptions are probably correct. If the gap is huge, you have a problem.
My SOM is small, is that bad?
No, quite the opposite. A SOM of $2-5M in Y3 is realistic and credible. VCs prefer that to a made-up $500M SOM.
How do I justify my market share?
Use your real data: beta conversion rate, sales team capacity, comparison with competitors. "We convert 5% of trials and can do 100 demos/month = 60 customers/year."
Conclusion
TAM SAM SOM isn't a fiction exercise. It's your demonstration that you understand your market better than 90% of founders who pitch.
📋 TAM SAM SOM Checklist
- ☐ I calculated both Top-Down AND Bottom-Up
- ☐ My sources are cited and verifiable
- ☐ My Y3 SOM is < 5% of my SAM
- ☐ I can defend every SAM filter
- ☐ My TAM is > $1B (otherwise, no VC)
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