The 4 Levels of Determining Market Opportunity
Defining your total market size is a vital factor to fully understanding your business and industry. Although many business owners want to market to everyone, there is always a select group of individuals that are the core group of customers. Businesses who know their target market and their total market size are able to segment their audiences, make more informed investment decisions, as well as increase their possibilities to convert customers into true ambassadors of their brand with repeat purchases while becoming unpaid spokespeople for your brand.
In market sizing, there are four total levels: Total Market, Total Addressable Market (TAM), Serviceable Market (SAM), and Serviceable Obtainable Market (SOM). Many business owners like to claim that “everyone can use their product”. This is the total market. However, what many business owners fail to accept is that they are not selling to everyone in existence in the world. Simply put, just because everyone can, does not mean everyone will. The Total Market represents the broadest possible universe of people who could theoretically use the product, but it is not used for financial forecasting or strategic planning. So, while there are four total levels, we simply focus on the three primary levels for market sizing because they reflect actual demand, reachable customers, and realistic market share.
The three primary levels, or the TAM, SAM, and SOM, are the levels that help you understand the full universe of potential customers, the portion you can realistically serve, and the share you can reasonably capture.
Total Addressable Market (TAM)
The Total Addressable Market is the largest area out of all levels. It is where you begin by defining the overall population of people who could logically purchase your product or service.
Definition: The total market size for a product or service at a specified period of time or your full revenue opportunity if you achieved 100% market share.
Pro Tip: Segment your market first, then complete the math to determine the TAM.
How to Calculate: Total Addressable Market = Total number of potential customers × Price (or annual revenue per customer)
Example: You are starting a lipstick brand for women. You are selling your lipstick for $20 a unit. You research and learn that there are 3.8 billion women in the world. However, only women who buy lipstick belong in your TAM. For simplicity, if you assume all women are potential buyers: TAM = 3.8 billion women × $20 = $76 billion.
Serviceable Available Market (SAM)
The Serviceable Available Market or SAM. The SAM scales the TAM down by focusing on the customers you can realistically reach based on geography, regulations, distribution, or product fit.
Definition: The potential sales value of a specified market segment over a specified period of time that is limited to available demand for a particular product/service.
Pro Tip: Leverage market research to better estimate your available market opportunities.
How to Calculate: SAM = TAM narrowed by geographic, demographic, or product‑specific constraints
Example: You want to sell your lipstick brand in retail locations that sell beauty products within the U.S. You calculate that there are 160 million women in the U.S. and you will sell your lipstick for $20 per unit. SAM = 160 million women × $20 = $3.2 billion.
Serviceable Obtainable Market (SOM)
The Serviceable Obtainable Market, or SOM, is the portion of the SAM that you can realistically acquire based on competition, resources, and your go‑to‑market strategy.
Definition: The market size your business is realistically targeting.
Pro Tip: If you are already in business, review historical sales performance records to help define a sales projection target. If you’re just getting started, identify sub‑markets by geography or market factors where you believe you can generate sales quickly.
Calculation: SOM = SAM × Expected Market Share (penetration rate)
Example: You want to focus your new lipstick brand on college‑aged women, age 18–24, who live in metropolitan areas of the U.S. You believe New York City will be your top market. Through research, you find that there are 1 million women who fit these demographic factors. You also find that 80% of college‑aged women wear makeup and lipstick specifically. Potential buyers = 1 million × 80% = 800,000 women If you believe you can capture 20% of them: SOM = 800,000 × 20% × $20 = $3.2 million.
These three distinct levels are critical for business owners and managers to understand.
TAM is the overall market size that encapsulates anyone who could logically purchase your product or service.
SAM narrows the TAM to the customers you can realistically reach based on geography, distribution, and product fit.
SOM identifies the portion of the SAM you can realistically capture based on your strategy and competitive environment.
Coupled together, each of these helps a company make better business and investment decisions as well as helps you understand your specific business more thoroughly.