TAM, or total addressable market, is the revenue you would earn if every possible customer bought from you. It is used in plans, pitches and pricing decisions, and it is often calculated badly: a large number from a report, divided by hope. This guide explains the three ways to calculate TAM, how SAM and SOM narrow it, and walks through a bottom-up B2B example with invented numbers you can copy.
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TAM, SAM and SOM
Everyone
TAM
Total addressable market: annual revenue if every company that could use your product bought it.
Who you can serve
SAM
Serviceable addressable market: the part of TAM your product, regions and channels can actually reach today.
What you can win
SOM
Serviceable obtainable market: the share of SAM you can realistically win in the next few years.
Each layer is a subset of the one before it. TAM shows the size of the opportunity; SOM is the number you should plan around.
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Three ways to calculate TAM
| Method | How it works | Good for | Watch out |
|---|---|---|---|
| Bottom up | Number of possible customers times what each would pay a year | Most B2B products; plans and pricing | Needs a real count of companies |
| Top down | Take a whole industry's spend from a report and estimate your slice | A quick first sense of scale | Hard to check, and usually too big |
| Value based | What customers would pay based on the value you create for them | New categories with no existing spend | Easy to overstate the value |
For B2B, bottom up is the most useful, because it is built from things you can count and check. Use top down only as a sense check.
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How to calculate TAM bottom up, step by step
- Define who could buy. Write the company-level filters: industry, size and region. Start from your ideal customer profile, then widen it to everyone who could plausibly use the product.
- Count those companies. Use a company database, public registers, industry associations or government business statistics. Write down the source and the date.
- Set the annual value of one customer. Use your real average contract value if you have customers, or your list price for a typical customer if you do not.
- Multiply. Number of companies times annual value per company is your TAM.
- Narrow to SAM. Remove the companies you cannot serve today: regions you do not sell in, sizes your product does not fit, systems you do not integrate with.
- Estimate SOM. Take a realistic share of SAM for the next few years, based on your sales capacity and how fast you have won customers so far.
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Where to find the company count
The count is the part of a bottom-up TAM that most people skip, and the part that makes it believable. Good places to look:
Government business statistics. Many countries publish counts of businesses by industry and size band. They are free and dated.
Public company registers. Registers list active companies with an industry code, which you can filter and count.
Industry associations. Member lists or published member counts cover niches that broad statistics miss.
Company databases. A filtered search gives a count quickly; check a sample, because coverage varies by region and size.
Your own CRM. Accounts you already know are a floor, not a ceiling.
Use two sources where you can. If they disagree a lot, the difference usually tells you something about how each one defines the market.
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A worked example
An invented example, with round numbers. A company sells scheduling software to physiotherapy clinic groups.
| Step | Assumption | Result |
|---|---|---|
| Who could buy | Clinic groups with 2 or more sites, in the US and UK | |
| Count them | From a company database and an industry association list | 6,000 groups |
| Annual value | Average contract of $8,000 a year | |
| TAM | 6,000 × $8,000 | $48,000,000 a year |
| SAM | Only the US for now, and groups of 2 to 50 sites: 2,500 groups × $8,000 | $20,000,000 a year |
| SOM | Win 4% of SAM in three years: 100 groups × $8,000 | $800,000 a year |
The TAM sounds large. The SOM is what the sales plan, hiring and budget should be built on. The numbers are made up; the method is the point.
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How to check your TAM
Compare methods. If a top-down figure is ten times your bottom-up one, find out why before using either.
Check the count against reality. Pick twenty companies from your count at random and confirm they could really buy.
Check the value against your deals. If your average contract is lower than the value you assumed, use the real one.
Write down every assumption, with its source and date, so anyone can repeat the calculation.
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How to use TAM, SAM and SOM
- In a plan. SOM sets a realistic revenue target; SAM shows how much room is left to grow.
- In a pitch. Show all three, and the bottom-up method behind them. Investors trust a counted number more than a quoted one.
- In sales. The companies counted in your SAM are the raw material for a target account list.
- In pricing. If SOM is too small to support the business at your price, the price or the market needs to change.
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Common TAM mistakes
Quoting an industry report as your TAM. "The software market is worth billions" is not your market.
Counting everyone who might benefit. TAM is companies that could buy your product, not everyone with the problem in theory.
Using list price for everyone. Many customers pay less, and small ones far less.
Treating TAM as a target. No company wins its whole market. Plan on SOM.
Never updating it. New regions, products or prices change every layer.
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The TAM checklist
Before you use your numbers
- TAM is calculated bottom up, from a count of companies.
- The count has a named source and a date.
- The annual value comes from real contracts, or is labelled as an assumption.
- SAM removes regions, sizes and systems you cannot serve today.
- SOM is a share you could win with your real sales capacity.
- A top-down figure was used only as a sense check.
- Every assumption is written down.
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Questions
What is the formula for TAM?
Bottom up: number of companies that could buy, multiplied by the annual revenue from one of them.
What is a good TAM for a startup?
There is no single figure. What matters is whether your SOM, the share you can realistically win, supports the business you want to build, and whether SAM leaves room to grow.
Should TAM use revenue or number of customers?
Both. Keep the count of companies alongside the revenue, because the count is what sales works from and the easiest part to check.
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Where to go next
New to the research side? Start with what sales prospecting is.