This article is Part 2 in a series. See Part 1 for an overview of your Total Addressable Market.
Startups use Total Addressable Market (TAM) calculations to determine the overall size of their target market.
But every company has limitations so you must understand the size of the market you can actually reach.
This is known as the Serviceable Available Market (SAM).
A Serviceable Available Market (SAM) calculation narrows the focus from a TAM projection, showing founders the percentage of the market that allows them to achieve their revenue objectives.
Startup founders operate within specific limitations. You need to know and accept these limitations before setting revenue goals.
Your limiting factors include the amount of funding, time (runway), resources (team size, skills, tools, etc.), geography, specialization, business model, product or service price points, and the customer size you’re aiming at.
As a general rule, large customers (usually known as Enterprise clients) take longer to make purchasing decisions than small and medium business (SMB) clients and startups.
Longer sales cycles directly impact revenue projections and cash flow forecasts, and these considerations should be factored into your TAM and SAM estimates.
Consequently, SAM estimates impact revenue goals, growth targets, and the valuation figures investors apply when offering funding.
Further down the road, SAM influences your startup’s potential market capitalization at an exit event, e.g., an acquisition or an Initial Public Offering.
What is a Serviceable Available Market (SAM)?
Your startup’s Serviceable Available Market (SAM) is an objective estimate of the percentage of the market you need to achieve your revenue targets.
Once you’ve worked out your total addressable market (TAM), you could be sitting on a $1 billion market opportunity. It’s exciting.
It could provide you with valuable leverage when negotiating fundraising and valuations with investors.
But . . . few companies capture 100% of a market’s value, especially if they are entering an already growing or mature market.
In certain scenarios, startups with innovative new products have first-mover advantages.
For example, HubSpot coined the term “inbound marketing” and created SaaS-based products to address the marketing and sales needs of software clients, startups, and small and medium businesses.
Over time, competitors will move into any new market.
HubSpot has dozens of competitors in the inbound marketing, automation, email, and customer relationship marketing (CRM) space.
No company ever captures 100% of any market.
Founders of startups and scaleups should be realistic about the portion of the market they can reasonably attain.
This means factoring in your business model, product or service limitations, geography, and other inhibiting factors.
What are the benefits of knowing your serviceable available market (SAM)?
Calculating your serviceable available market (SAM) is a critical step to take before setting revenue goals or speaking to investors.
1. Investors need to understand the reasoning behind SAM & revenue projections
TAM, SAM, and Serviceable Obtainable Market (SOM) calculations are more robust when you already have customers.
With customer and revenue figures, you can use this data to extrapolate the size of the potential market within your grasp and plan how to optimize the revenue potential.
Regardless of your dream or vision, you won’t be taken seriously without data and research-backed numbers that show what you’re aiming at and how you intend to make your dream a reality.
Investors want numbers, data, and facts. You will be in a stronger position in your fundraising efforts if you collate this information.
TAM, SAM, and SOM figures are the three foundation stones of meaningful revenue projections.
Without them, you won’t be able to give a credible answer when a potential investor asks, “How did you arrive at these figures?”
2. SAM demonstrates a market understanding
A clear understanding of SAM calculations also plays a role in aligning your product/service with the needs of your Ideal Customer Profile (ICP).
“Have I achieved Product-Market fit (PMF)?”
If the answer is yes, you should have a clear pipeline from the top of the funnel down to converting sales leads into customers.
It should be a trickle-down, active pipeline containing data-backed insights at every touchpoint. After that, it’s simply a case of optimizing it to increase revenue.
If the answer is no, your pipeline won’t function like that. You’ll have a turbulent sales cycle and a feast-or-famine approach to sales leads.
Conversions will be difficult, and potential customers won’t always understand why they need your product or service.
Working out your SAM gives you a fundamental understanding of your ideal customers and how to achieve product-market fit.
3. SAM is a valuable asset in sales and marketing strategies
Working out your SAM is beneficial when creating your sales and marketing strategy.
It shows you which markets to focus on, how to direct growth-based activities, and where to pick up quick wins (aka, low-hanging fruit).
Of course, you need the TAM and SOM calculations too. But knowing your SAM provides an advantage when creating actionable sales and marketing strategies that include annual and quarterly revenue targets.
How to calculate your serviceable available market (SAM)
The most accurate approach when calculating your total addressable market (TAM) is the bottom-up market size calculation — using in-house data from your customers.
Here’s how to do this:
Total Number of Potential Accounts X Annual Contract Value = TAM
Other methods include using third-party data to do a top-down calculation or using a value-driven approach, but the above method is the most accurate for revenue-generating B2B companies.
Once you determine a TAM figure, you can apply a range of relevant and realistic filters, such as geography, business model, and pricing.
Determine the percentage of the overall market you can target, and use this calculation:
TAM Target Segment X Annual Contract Value = SAM
Here’s how this would look in practice:
Using our example from the TAM calculation, we worked out the total market size is $25 million in revenue — if this startup reached 5,000 customers who each paid $5,000 per year (100% of the market).
However, as we’ve explained, no company ever captures 100% of the market.
For several reasons, our estimates show that this startup could only reach 50% of this market. The SAM would look like this:
50% X $25,000,000 = $12,500,000 (SAM)
Calculating SAM: Key takeaways
As you can see, calculating SAM is relatively simple provided you’ve got reliable customer and revenue data. Once you know the TAM, everything else (SAM & SOM) falls into place.
Working out your SAM allows you to refine that calculation further to set achievable revenue targets that will guide your sales and marketing strategies and operations.
As exciting as founding a startup is, it’s better for you, your investors, and your team if growth targets are grounded in reality.
A SAM calculation gives founders that much-needed grounding in what is achievable.
While not limiting growth potential, a SAM calculation takes the pressure off aiming at wildly unrealistic targets — like capturing 100% of a $1 billion market in 3 years.
Instead, focus your efforts on securing an ambitious percentage of a realistic sales target, enough to satisfy your dreams and investor growth targets.