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TAM Sizing

Guide to Understanding TAM Sizing

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TAM Sizing

TAM Sizing Methodology: How to Size a Market (Step-by-Step)

The total addressable market (TAM) represents the entire revenue opportunity present within a particular market, which is a function of customer demand and the pricing of products/services.

Upon establishing the revenue opportunity from selling a specific product/service, the company can then decide whether or not to enter a particular market.

In the absence of sufficient customer demand and revenue potential, most companies would be deterred from entering a given market.

While all TAM market sizing exercises are “ballpark” estimate figures, the process of taking a high-level view of the market landscape and segmenting customers into unique profiles can still be very insightful.

TAM vs. SAM vs. SOM

The total addressable market (TAM) can be further broken down into 1) the serviceable addressable market (SAM) and 2) the serviceable obtainable market (SOM).

  • Total Addressable Market (TAM) → The TAM is an all-inclusive, “birds-eye” view of the entire market (and representative of the total revenue potential in the market).
  • Serviceable Available Market (SAM) → The SAM refers to the proportion of customers counted in a company’s TAM that actually needs its products/services.
  • Serviceable Obtainable Market (SOM) → The SOM is defined as the company’s current market share that accounts for the proportion of its SAM that can realistically be captured across the forecast period alongside the growth of the overall market, i.e. the company is assumed to be able to retain its current market share percentage into the foreseeable future.

From the steps shown above, we start with the largest potential revenue value (TAM) and subsequently reduce the potential revenue based on the company and customer profile as well as relevant market assumptions to ultimately arrive at the SOM.

TAM Sizing Formula

In order to calculate the total addressable market (TAM), the total number of potential customers is multiplied by a pricing metric.

For instance, the pricing metric could be the average order value (AOV), annual contract value (ACV), average selling price (ASP), and more.

Further, the pricing terms are typically tier-based, so it is recommended to segment the customers by type, e.g. small and mid-sized enterprises (SMEs) vs. large enterprises.

One example formula for calculating the TAM in the SaaS industry is shown below.

Total Addressable Market (TAM) = Total Number of Customers × Annual Contract Value (ACV)

TAM Sizing – Excel Model Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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B2B SaaS TAM Sizing Calculation Example

Suppose a B2B SaaS company is performing a market sizing analysis to determine its revenue potential in the near-term future.

Currently, the company serves two types of customers, which are segmented by size.

Total Addressable Customers

  • Small and Mid-Sized Enterprise (SME) → 2,500 Customers
  • Large Enterprise → 200 Customers

For the next five years, we’ll assume that the growth rate for SME customers will be 5% and the growth rate for large enterprises will be 2%.

From 2021 to 2026, the total number of addressable customers has increased from 2,700 to 3,412.

With regards to the pricing, the annual contract value (ACV) of SMEs is $50k, whereas the ACV of large enterprises is $400k per year.

Annual Contract Value (ACV)

  • Small and Mid-Sized Enterprise (SME) = $50,000
  • Large Enterprise (SME) = $400,000

TAM Market Sizing Model Calculator

Top-Down TAM Revenue Analysis

In the next part, we can now calculate the TAM, SAM, and SOM.

For the total TAM market sizing, we’ll multiply the total number of SMEs by the ACV and then repeat the process for large enterprises.

SME Total Addressable Market (TAM) = Number of SME × SME Average Contract Value (ACV)
Large Enterprise Total Addressable Market (TAM) = Number of Large Enterprise × Large Enterprise Average Contract Value (ACV)

From the TAM, we’ll work our way down to the SAM by making assumptions about what percentage of the TAM is serviceable.

  • % Serviceable SME = 50%
  • % Serviceable Large Enterprise = 25%
SME Serviceable Attainable Market (SAM) = SME TAM × 50%
Large Enterprise Serviceable Attainable Market (SAM) = Large Enterprise TAM × 25%

Using those assumptions, we’ll multiply those percentages by the TAM for the entire forecast.

In the final step, we’ll calculate our SOM by making assumptions about what percentage of the SAM is obtainable.

  • % Obtainable SME = 20%
  • % Obtainable Large Enterprise = 10%
SME Serviceable Obtainable Market (SOM) = SME SAM × 20%
Large Enterprise Serviceable Obtainable Market (SOM) = Large Enterprise SAM × 10%

In closing, we can observe how from our initial period to the end of the five-year forecast, the total serviceable obtainable market (SOM) expands from $14.5 million to $20.9 million.

TAM Market Sizing Analysis

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