Understanding and calculating market size with TAM, SAM and SOM: complete guide for startups

Every investor pitch eventually comes down to the same question: how big is this opportunity? You can have the best product and the sharpest team, but if your market's too small, venture capital won't make sense. Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) are the three metrics that answer this question for investors.

This guide walks through how to calculate each one, which approach works best for different business models, and why investors scrutinise these numbers so closely. As you work to capture more of your addressable market internationally, Wise Business simplifies the cross-border payment challenges that come with expansion.

Quick summary:

Total Addressable Market (TAM): The maximum revenue if you captured 100% of the entire market with no constraints. Serviceable Addressable Market (SAM): The portion of TAM you can realistically serve with your current product, pricing, distribution, and geography. Serviceable Obtainable Market (SOM): The realistic share of SAM you expect to capture in the next three to five years, accounting for competition and your execution capacity. Calculating these metrics is crucial for proving market viability, guiding strategic decisions (e.g., expansion), and matching your business to the right investors.

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Understanding market sizing

Investors ask about market size because they need to know if your opportunity justifies the risk. Different investors need different market sizes to make their economics work. Market sizing proves you know exactly who pays for your product and how many of those people exist.

Skipping this step is dangerous. When 42% of startups fail because nobody actually wants what they built,¹ you can't afford to guess about demand. Market sizing forces hard questions. Is this problem growing or fading? Can you reach enough people to justify the work? Most founders would rather build a product than answer these, which is exactly why you should answer them first.

TAM shows the full opportunity if you capture everyone. SAM shows the slice you can actually reach based on your distribution and product capabilities. SOM shows what you'll realistically win against competitors in three to five years. Investors want all three because a massive TAM with a weak SAM logic suggests you haven't thought it through.

TAM vs SAM vs SOM, a summary

The three metrics measure different parts of your opportunity. TAM is the dream scenario where you capture everyone. SAM is what you can realistically serve. SOM is what you'll actually win. Here's how they compare:

Metric	What it measures	Typical calculation	What investors look for
TAM (Total Addressable Market)	Full market if you had 100% share with no constraints	Total potential customers × average annual spend	Proof the market is big enough
SAM (Serviceable Addressable Market)	Portion you can serve with your product and distribution	TAM filtered by geography, product fit, pricing, channels	Evidence you understand who actually buys from you
SOM (Serviceable Obtainable Market)	What you'll capture in 3-5 years	SAM x realistic market share	Realistic growth projections that account for competition

What is TAM (Total Addressable Market)?

TAM measures the maximum revenue you could generate if you captured every potential customer in your market. It's the dream scenario where you face no competition, reach everyone who needs your product, and convert them all. Obviously, this never happens, but TAM shows whether the ceiling is high enough to bother.

Investors use TAM to filter out opportunities that are too small. A £20 million TAM might support a profitable small business, but venture capital might need a lot more to justify the risk. If your TAM is £50 million and you're asking for £5 million in funding, the math doesn't work. There's not enough room for the business to grow into a return that makes sense for their fund.

TAM calculation with example

The basic formula is simple: total potential customers x average annual spend per customer = TAM.

Say you're building payroll software for UK SMEs. There are 5.7 million SMEs in the UK.² Not all of them need payroll software. Filter out the 4.3 million with zero employees (just owner-operators who don't run payroll). That leaves 1.4 million SMEs with employees who actually need your product. If they each spend £1,200 annually on payroll software, your TAM is £1.68 billion.

The tricky part is getting accurate numbers. You can't just multiply the total number of businesses by your price and call it TAM. You need to understand who actually has the problem you're solving. Payroll software for businesses with no employees makes no sense. Including them inflates your TAM and makes investors question whether you understand your own market.

Benefits of using TAM for market sizing

Calculating your TAM gives you three concrete benefits:

• Tells you if your business idea is big enough: A £30 million TAM means if you capture 5% over three years, you'll make £1.5 million annually. That might work for a solo consultant, but it won't support a venture-backed company with 20 employees. TAM shows you the revenue ceiling before you spend years building.
• Helps you plan future expansion: Your payroll software TAM of £1.68 billion only includes UK SMEs. What about large corporations? What about adding time tracking or benefits management features? What about expanding to Europe? TAM calculations for each adjacent market show you where to grow once you've captured your initial segment.
• Forces you to validate your assumptions with real data: You can't calculate TAM without answering hard questions. How many potential customers actually exist? Will they pay your price? Do they buy annually or monthly? If you're making up numbers, TAM calculations expose that fast. Investors will ask where every figure came from.

💡 Read more about: understanding and calculating TAM

What is SAM (Serviceable Available Market or Serviceable Addressable Market)?

SAM is the portion of your TAM you can actually serve with your current product, pricing, and distribution. It answers the question: out of everyone who could theoretically buy from you, how many can you realistically reach?

Your TAM might be massive, but if you only operate in the UK, customers in Australia don't count toward your SAM. If your product works best for businesses with 50+ employees, smaller companies drop out. If you only sell through direct sales and can't afford a channel partner network, you lose everyone who won't take a sales call. SAM strips away the parts of the market you can't access right now.

SAM calculation with example

Start with your TAM, then apply filters based on your business constraints. Here's how it works with the payroll software example:

Starting point: £1.68 billion TAM (1.4 million UK SMEs with employees × £1,200 annual spend)

Product fit: Your software works best for businesses with 10-50 employees. Smaller companies want simpler tools. Larger ones need enterprise features you haven't built yet. Of the 1.4 million SMEs with employees, 220,085 fall in this range.²

• Remaining addressable market: 220,085 businesses

Geographic reach: You only serve UK businesses. Your product handles UK tax codes and HMRC integration but nothing else. All your TAM customers were already UK-based, so this doesn't shrink the number.

• Remaining addressable market: 220,085 businesses

Distribution capability: You sell directly through your website with no sales team. You can reach businesses actively searching for payroll software, but you'll miss companies loyal to their accountant's recommendation or those who want in-person demos. Digital channels might reach 40% of your target segment.

• Remaining addressable market: 88,034 businesses

Your SAM: 88,034 businesses × £1,200 = £105.6 million

The gap between your £1.68 billion TAM and £105.6 million SAM isn't a failure. It shows you understand your limitations and where you'll need to improve to grow.

Benefits of using SAM for market sizing

SAM gives you practical benefits that TAM alone can't provide. Here are some benefits of using SAM:

• Focuses on your go-to-market strategy: Instead of chasing 1.4 million SMEs, you're targeting 88,000 businesses in a specific employee range through specific channels. That's a marketing plan you can actually execute. You know where to advertise, which features to build, and what pricing objections to expect.
• Makes revenue projections credible: Investors don't believe you'll capture 10% of a £1.68 billion TAM in year one. But capturing 5% of a £105.6 million SAM sounds achievable if you can show how you'll reach those specific customers. SAM ties your forecast to reality.
• Shows investors you've thought past the hype: SAM proves you've identified which customers you can actually serve and why. It shows you understand the difference between a massive industry and the slice you can realistically capture.

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What is SOM (Serviceable Obtainable Market)?

SOM shows what you'll realistically capture from your SAM in the next three to five years. This is where competition, your execution capability, and market dynamics come into play. You've identified 88,034 businesses you can serve, but you won't win all of them.

Early-stage startups usually capture a small fraction of their SAM in the first few years. Claiming you'll take 30% of your market in year two tells investors you don't understand how hard customer acquisition actually is. SOM forces you to account for competitors who already own relationships, customers happy with their current solution, and your own limits on sales capacity.

SOM calculation with example

SOM isn't a simple formula. You need to think through how many customers you can actually win based on competition, your resources, and how fast you can sell. The specific factors depend on your business, but most startups need to account for competitive pressure, their own team capacity, and market conditions.

Here's how to work it out for the payroll software example:

Starting with your SAM: £105.6 million (88,034 UK SMEs you can reach with 10-49 employees)

Then, consider the following factors:

• Competition: Assuming three established payroll providers already serve this market. They've got brand recognition, existing customer bases, and switching costs work in their favour. You're fighting for businesses either dissatisfied with current providers or growing into payroll software for the first time. That's maybe 15% of the market actively looking each year.
• Your execution capacity: You've got two salespeople and a marketing budget of £150,000. You can realistically close 100 customers in year one, maybe 250 in year two, 500 in year three. That's 850 customers over three years.
• Market growth: The SME segment grows over time, so your addressable base increases gradually. But you're also competing against new entrants and existing players who won't sit still.

As a result, your three-year SOM will be:

850 customers × £1,200 = £1.02 million annual recurring revenue by year three.

That's roughly 1% of your £105.6 million SAM.

If this seems small compared to your SAM, that's the point. SOM shows what's actually achievable given real constraints. You can present investors with a plan to reach 1% and prove it with unit economics, or you can claim 20% and lose credibility.

Benefits of using SOM for market sizing

Calculating SOM delivers three specific advantages:

• Creates believable financial projections: Banks and investors see hundreds of pitches claiming massive market capture. When you say "we'll win 1-2% of our SAM in three years," then back it with customer acquisition costs, sales capacity, and conversion rates, you sound like someone who's thought it through. That credibility matters more than inflated projections.
• Identifies what you need to scale: Your SOM shows the gap between current capability and growth targets. If you want £5 million revenue in three years instead of £1 million, you can see exactly what needs to change: hire more salespeople, build channel partnerships, or increase marketing spend. SOM turns growth goals into resource requirements.
• Helps you spot when to expand your SAM: Once you're capturing 5-10% of your current SAM, you've got enough market penetration to consider expansion. Maybe you build features for larger companies, add international markets, or develop channel partnerships. SOM shows when you've maxed out your current segment and need to grow your addressable market.

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Why TAM, SAM, and SOM Matter for Business Strategy and Investors

These three numbers do more than fill slides in a pitch deck. They determine whether your business idea is viable, which investors will take you seriously, and when you need to change direction.

Proving your business can sustain itself

A business needs enough customers at the right price point to cover costs and generate profit. TAM tells you if the total opportunity is big enough. SAM shows whether you can reach enough of those customers with your current capabilities. SOM reveals if you can capture sufficient market share to hit revenue targets. Without these numbers, you're building blindly. You might spend two years developing a product only to discover the addressable market can't support your team.

Guiding major strategic decisions

When customers request features, or you consider expanding into new markets, market sizing gives you a framework for deciding. You can estimate the incremental SAM from a new product line or geography, then calculate whether the additional revenue justifies the investment. The same logic applies to pricing changes, hiring plans, and partnership strategies. These decisions stop being gut calls and become data-driven choices.

Matching your market to the right investors

Different investors need different market sizes to make their economics work. Venture capitalists need markets large enough to support companies that can return their entire fund. Angel investors can work with smaller opportunities. Bootstrapping makes sense for even smaller markets. Knowing your TAM and SAM early saves months of pitching investors whose fund model doesn't match your market reality.

Spotting when to pivot or double down

Your actual performance against SOM projections tells you what's working. If you're capturing market share faster than projected, you might need to accelerate hiring or raise growth capital. If you're consistently missing targets, something fundamental is wrong with your product-market fit, pricing, or distribution strategy.

Market sizing gives you the baseline to measure against. Without it, you can't tell if slow growth means you need to fix something or if you're progressing normally for your market.

Serve international customers with Wise Business

Expanding beyond the UK means dealing with multiple currencies. You invoice a German client in Euros, pay a Polish contractor in Zloty, then reconcile everything back to pounds for your accounting software. Exchange rates, transfer fees, and payment delays start eating into your margins.

Wise Business handles cross-border payments at the mid-market exchange rate. Send to over 140+ countries, hold balances in 8+ currencies, and connect directly to Xero or QuickBooks. The Essential plan is free and includes transfers, business cards with up to cashback, and multi-user access. The Advanced plan costs £50 (Advanced plan) or for free (Essentials plan) and adds local account details in 8+ currencies, invoicing, and payment links.

Everything runs through one dashboard. Schedule batch payments, track spending by team member, and manage balances across currencies without juggling multiple banking relationships. Create your Wise Business account today to serve international customers better.

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*Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

Sources used:

1. The ultimate startup guide with statistics – Founders Forum Group
2. Business population estimates GOV.UK

Sources last checked: 19/12/2025