Calculating Market Size: Get Familiar with Your TAM-SAM-SOM

Ever heard the saying “Market determines your potential, but you determine the outcome” when building a startup?

Whether or not you’ve heard: if you’re a founder, your market is something you should understand in-depth to get a better picture of the potential ahead of you.

In this blog post, we want to demystify the entire market sizing concept and process—so you’ll be well on your way to doing as accurate of an estimation as you can.

Key concepts in market sizing

For startups, it's crucial to understand the potential market for your offer.

Traditional market analysis can be time-consuming and complex, so the TAM-SAM-SOM model offers a standardized and efficient way to estimate your market potential.

But before we dive in, let's summarize the key concepts:

• TAM (Total Addressable Market): The entire potential market for your product or service. Imagine if you achieved 100% market share – that's your TAM. It answers the question of who could theoretically buy your product, ignoring all market barriers and competitors.
• SAM (Serviceable Addressable Market): This is the portion of the TAM that you can realistically reach with your specific product or service and business model. Think of it as your target market within the larger market. It's important because it shows the medium-term potential of your business idea and helps you define your target group.
• SOM (Serviceable Obtainable Market): This is the portion of the SAM that you can realistically capture in the short term. It considers your current resources, competition, market conditions, production capacities, and marketing efforts. The SOM shows your initial target market share and the sales potential for your startup's first growth phase.

Why does market sizing matter?

By understanding and analyzing your TAM, SAM, and SOM, you can gain valuable insights into your market potential, set realistic goals, and develop effective strategies for growth.

Understanding your market is crucial for any business. While domain expertise helps you develop the right solutions and identify your target audience, market sizing reveals the true potential of your opportunity.

It tells you how big the market is, which segments to prioritize, and whether it's large enough to support a thriving business.

Here's why it's critical:

• Focus your strategy: Knowing your target market size allows you to tailor your product, pricing, marketing, and sales efforts to reach the right customers effectively. This focused approach helps you prioritize your activities, make the most of your limited resources, and increase your chances of success.
• Secure funding: Investors want to see that you've done your homework. TAM, SAM, SOM is seen as a basic level of understanding you should have of the market you operate in. A well-defined market size demonstrates that your business has room to grow and generate significant revenue, making it more attractive to investors.
• Validate your idea: Is the market big enough to support your business? If your TAM is too small, even capturing a significant share might not generate enough revenue for your startup to be viable. If the market is too small or saturated, you can adjust your approach, explore niche segments, or refine your business model.

Your market size tells you and other stakeholders, that there is space and opportunity for expansion should a founder put in more resources into their venture or if a realignment is needed to service other verticals.

How do you do market sizing as a startup?

There are two main ways to go about computing for your market size. Let’s get a quick overview of both and also the main considerations when applying them.

First is the bottom-up approach:

The concept here is to start small and think big.

This approach focuses on individual units or customers and builds on them. Start by estimating the number of potential customers who might be interested in your product or service.

Then, you estimate how much each customer is likely to spend. By multiplying these numbers, you can calculate your total potential market size.

The second is the top-down approach

With this approach you start big and then narrow it down.

You begin with the overall market size for your target industry.

Then narrow it down. Consider factors like target demographics, geographic location, and the portion of the market you expect to capture.

This helps you estimate the specific segment of the market that is relevant to your business.

Considerations when using these approaches:

Bottom-up

This approach is more accurate as it's based on primary data from surveys or interviews. Because of this, it provides specific data insights about your target audience.

However, it requires to obtain this information about your customer base and pricing, which can be challenging for new businesses or markets that lack this data.

Top-down

The top-down approach is often easier for early-stage startups to use because it relies on readily available market research and industry reports.

However, it can be less precise because it relies on broader assumptions about the market and might cause overlooking important details of the market.

Ultimately, the best approach for market sizing depends on your specific needs and circumstances.

If you're in an early stage with limited data, the top-down approach can provide a valuable starting point.

However, as you gain more information about your target market and refine your business strategy, the bottom-up approach will likely create a more accurate picture.

Consider the factors of data availability, accuracy requirements and the market stage when making your decision.

No matter which approach you choose, remember that market sizing is an ongoing process. As your business grows and evolves, your target market and its potential will also change.

Regularly revisit and refine your market size estimates to ensure they remain relevant and informative.

Practical Example: Bottom-Up Approach

Let’s say you are a Manila-based Software-as-a-Service (SaaS) company offering a mobile and desktop based store management platform for Micro- to Medium-sized Food and Beverage Service companies.

You product is currently priced at Php 2,500.00 monthly per store, and you plan to introduce a premium tier priced Php 10,000 per month.

Calculating Total Addressable Market (TAM)

A bottom-up approach would be first sizing the number of food-service MSMEs in the country, which according to the DTI was around 190,900 (food service and accommodation).

Assuming F&B represent 80% of these companies, we then come up around 152,720 Food and Beverage MSMEs in the PH as a whole.

Based on industry reports, we assume that the average ownership is 2 stores per company and also assume that 20% of these businesses are bigger and more advanced and fall into the premium tier clients.

So based on these numbers, gathered by you through research of reports and proxy data, we have the following informations to calculate our TAM:

• Number of F&B MSMEs: 152,720
• Average stores per company: 2
• Total potential stores: 305,440
• Premium tier adoption: 20%
• Premium stores: 61,088
• Standard stores: 244,352

TAM Calculation: (61,088 stores x Php 10,000/store/month x 12 months) + (244,352 stores x Php 2,500/store/month x 12 months) = Php 14.7 billion (approximately US$ 250 million)

Remember, TAM shows the potential if you'd have a monopoly in F&B store management software market. In this case, that would be $250 million per year.

Calculating Serviceable Addressable Market (SAM)

To calculate the SAM, you now need to make assumptions of which share of the TAM you can realistically capture in the medium term with your specific product and business model. In our example these factors could include:

• Location: Focus on specific cities or regions where you have a strong presence or where your product is most relevant.
• Business size: Target businesses within a specific store count, revenue range or employee count.
• Technology adoption: Focus on businesses that are more likely to adopt SaaS solutions.
• Language: Consider language preferences and ensure your platform and support materials are available in relevant languages.

Since most business owners in the Philippines speak english and our software can cater any size of business, we assume a limitation in locations since we need a sales team to reach out and implement it in person, as well as the tech readiness of a business.

• For the Geographic focus we assume Metro Manila and Luzon (representing roughly 50% of the total potential market)
• For the technology adoption we want to target businesses with a higher likelihood of adopting digital solutions (representing 70% of the geographically focused market)

SAM Calculation:

Php 14 billion (TAM) x 50% x 70% = Php 5.1 billion (approximately $88 million)

The $88 million per year present the medium term opportunity if you would capture all tech ready F&B businesses in Metro Manila and Luzon.

Calculating Serviceable Obtainable Market (SOM)

Now, as for our SOM, this is the number we can realistically cater to in the short term (first three years) based on your resources, competitive landscape and customer acquisition.

In our example we have evaluate the current resources and limitations, with factors including:

• Sales team size and reach: How many customers can the sales team realistically acquire, manage and retain?
• Marketing budget and channels: How many potential customers can you effectively reach with your marketing efforts?
• Onboarding and support capacity: How many new customers can you onboard and provide adequate support to?
• Financial resources: Do you have the financial resources to support rapid growth and customer acquisition?

We assume that the venture can cater to 15,000 stores during its first three year of operations due to estimations taking into account our infrastructure, sales, and manpower resources**.**

SOM Calculation:

(15,000 stores x 20% (premium stores) x Php 10,000/store/month x 12 months) + (15,000 stores x 80% (standard stores) x Php 2,500/store/month x 12 months) = Php 720 million (approximately US$ 12.3 million)

The SOM shows you the current market size which could generate a potential yearly revenue of $12.3 million if you are able to cater 15,000 stores with your software.

Practical Example: Top-Down Approach

For the top-down approach, on the other hand, we look at the F&B industry revenue figures and assume applicable spends on software.

Calculating Total Addressable Market (TAM)

The top-down approach starts with the overall market size and narrows it down to estimate your potential market share.

For this exercise, we can use data from the Philippine Statistics Authority (PSA), which states a total Accommodation and F&B service market size of Php 619.9B ($10.6B) — of which the PSA data shows a 75.5% contribution (Php 467.7B) of Restaurants and mobile food service activities. This serves as our largest potential customer base and already excludes the big food chains.

Additionally we research the MSME share, which is at 99.94% based on the Philippine National Tax Research Center Report. We also assume an average management software spend of 3% of revenue based on industry benchmarks and software spending trends in the F&B sector.

TAM Calculation:

Php 467.7B (Total F&B Market Size) x 99.94% (MSME Share) x 3% (Software Spend) = Php 14 billion (approximately $240 million)

This TAM represents the total potential revenue for store management software within the Philippine F&B MSME market.

Calculating Serviceable Addressable Market (SAM)

To calculate the SAM you now need to make assumptions again of which share of the TAM you can realistically capture in the medium term with your specific product and business model. In our example we take the same factors as assumed in the Bottom-Up approach:

• For the Geographic focus we assume Metro Manila and Luzon (representing roughly 50% of the total potential market)
• For the technology adoption we want to target businesses with a higher likelihood of adopting digital solutions (representing 70% of the geographically focused market)

SAM Calculation:

Php 14 billion (TAM) x 50% (Geographic Focus) x 70% (Technology Adoption) = Php 4.9 billion (approximately $83.8 million)

This SAM represents the portion of the market you can realistically capture in Luzon.

Calculating Serviceable Obtainable Market (SOM)

Now, as for our SOM, the the number we can realistically cater to in the short term we use the same assumption as in our Bottom-Up approach, since our resources stay the same. In our example we assumed that the venture can cater to 15,000 stores during its first three year of operations. The only new assumption we make is that our average spend per software will be Php 4,000.

SOM Calculation:

15,000 stores x Php 4,000/store/month x 12 months = Php 720 million (approximately $12.3 million)

This SOM represents your most achievable revenue goal in the short term, considering your current capacity and market conditions.

Wrapping Up

Not only is knowing your TAM-SAM-SOM an important step to score investors, it’s also a great step for early-stage founders to see if there is a potential market for your idea.

Remember some key takeaways:

• Be realistic: Avoid overestimating your reach or market share. Better to be conservative in your estimations then exceed expectations, versus setting unrealistic goals then falling short.
• Validate your assumptions: Base your calculations on reliable data and research. Don't rely on guesswork.
• Refine your estimates: Market sizing is an ongoing process. Revisit and adjust your calculations as your business grows and gathers more data, to ensure they remain accurate and relevant.
• Use both approaches: If possible, use both bottom-up and top-down approaches to validate your estimates and gain a more comprehensive understanding of your market potential. This will also show you if there is a big gap between the two approaches or not.

Use all the concepts and examples we shared above to help you find your own TAM-SAM-SOM and get on the road to building that successful startup that truly makes an impact in your market.

FAQs

Help! I don’t know where to start calculating my TAM, SAM, and SOM.

While it can be overwhelming to think about calculating your market size for any reason—initial scoping for your idea, or preparing for a pitch to an investor—know that this is typically not an exact science.

There are several approaches to finding TAM, SAM, or SOM, and the most important thing at this step is to get the best information you can with the sources and assumptions you have.

Don’t be discouraged if you feel confused or unsure; remember this is all part of the whole startup experience where you won’t always have things figured out 100% of the time.

If you’re really in doubt and need some pointers, our team might be able to help. Book a call during our Open Office Hours. You can talk with one of our team and get the support you need relating to your TAM-SAM-SOM.

What sources can I use to calculate TAM, SAM, and SOM as a Philippine-based startup?

There are several sources you can check to get you started:

• Local government agencies such as Philippine Statistics Authority (PSA) and Philippine Institute for Development Studies (PIDS) publish regular reports containing demographic information in the Philippine market
• Statista is an extensive collection of global and local statistics, reports, and insights
• Independent reports published by different research groups. Check your industry for any niche-specific bodies that publish yearly reports that may contain market information for your needs.

What if I can only find global or US-based data—but my startup is only relevant in the Philippines (or other countries)?

Global or foreign data and trends might not be directly applicable to individual countries due to culture, behaviors, habits, climate and other country specific factors.

In some cases, like markets with similar characteristics, they can give you a rough estimate as a proxy to work with.

Cases like these are best tackled through identification of customer demographic information through interviews and other primary data sourcing and doing the bottom-up approach.

When in doubt, we’re here to help. If you’re building an early-stage Philippine-based startup—or an early-stage startup that’s expanding to the Philippines—and you aren’t sure how to measure your TAM-SAM-SOM in the best context, book a call during our Open Office Hours to chat with one of our team.