Market & Strategy

TAM / SAM / SOM Framework

Market sizing done right - how to build a number that holds up in a VC room, the difference between top-down and bottom-up, and what each tier actually means.

The three tiers

TAM

Total Addressable Market

The total revenue opportunity if your product captured 100% of the relevant market - every potential customer, every geography, every use case you could plausibly serve.

Formula

Total potential customers × Average contract value

Example

There are 2.5M SMB restaurants in North America. At $200/mo, TAM = $6B/yr.

VC perspective: Investors want TAM > $1B. Venture math doesn't work on small markets - even a 10% share of a $200M market doesn't return a fund. If your TAM looks small, you're either defining it too narrowly or you're in the wrong market for VC.

SAM

Serviceable Addressable Market

The slice of TAM your product can actually go after given your current go-to-market approach, geography, language, and product scope. Not everyone in the TAM is reachable.

Formula

Addressable customers (filtered by segment, region, fit) × ACV

Example

You only support English, so you target 1.8M English-speaking SMB restaurants. At $200/mo, SAM = $4.3B/yr.

VC perspective: SAM is where your pitch lives. Investors will mentally sanity-check whether your SAM is real - that you can actually reach these customers through your sales motion, not just that they theoretically exist.

SOM

Serviceable Obtainable Market

The realistic share of SAM you can capture in the near term - typically 3 to 5 years. This is your actual target, grounded in your current capacity, sales cycle, and competitive position.

Formula

SAM × Penetration rate (typically 1-5% for early stage)

Example

Targeting 1% penetration of SAM in year 3. SOM = ~$43M ARR. At 18 months/hire and 10 salespeople, this is defensible.

VC perspective: SOM is where founders most often lose credibility. '1% of China' is a red flag - it suggests you haven't thought about how you actually win customers. Your penetration rate should be grounded in your sales capacity and go-to-market motion, not picked to produce a convenient number.

Top-down vs. bottom-up

There are two ways to calculate market size. Most founders default to top-down because it’s faster. Bottom-up is harder but it’s the one that survives a VC’s questions.

Top-Down

Fast, weak

Start with a large industry report and carve out your segment. The global restaurant software market is $12B (Gartner). SMBs are 40% of that. North America is 35%. So TAM = $1.7B.

Strengths

Quick to produce - useful for a first-pass sanity check

Gives you a number investors recognize if the source is credible

Weaknesses

You're just doing math on someone else's assumptions - investors know this

Industry definitions rarely match your actual customer or product

Easy to manipulate by choosing a convenient report or definition

Doesn't show you understand your customer or how you'll reach them

When to use: Use it to anchor your TAM with a third-party citation. Never use it alone.

Bottom-Up

More work, much stronger

Start with your actual customer unit and price. Count the real number of potential buyers, multiply by what you charge. Build the number from the ground up using data you can actually verify.

Strengths

Grounded in your real pricing and customer - harder to dismiss

Forces you to actually understand who your customer is

Defensible in a room: every assumption is yours to explain

Reveals your go-to-market thinking naturally

Weaknesses

Requires research - you need actual counts of potential customers

Can understate TAM if you define the customer too narrowly

When to use: Always use this as your primary method. Validate against a top-down number if you can.

Common mistakes

Starting with "the global X market is $Y billion"

This is top-down, and investors have seen it a thousand times. It tells them nothing about whether you've actually thought through your customer. Lead with bottom-up.

Confusing TAM with SAM

TAM is the theoretical ceiling. SAM is what you can actually go after. Presenting TAM as your target market signals you haven't thought through your go-to-market.

Presenting an implausible SOM

"If we capture just 1% of the market..." reads as lazy. 1% of a $10B market is $100M - do you have a plan to get there? Show the math: sales reps, cycles, conversion rates.

Using stale or unverifiable data

A 2019 Gartner report for a market reshaped by AI or COVID is not credible. Date your sources and use recent data where you can.

Not showing the path between SOM, SAM, and TAM

Investors want to understand how you expand from SOM to SAM over time - new geographies, new segments, adjacent products. The progression should be a story, not three separate numbers.