The three layers, defined precisely
- TAM: annual revenue if every entity with the problem bought a solution at your price.
- SAM: the portion of TAM your model, channel, geography and compliance position can actually serve.
- SOM: the share of SAM you can realistically win within the plan horizon, given capacity and competition.
Build TAM from units, not from reports
Start with a countable population: registered businesses in a category, licensed practitioners, vehicles in service, households above an income threshold. Public registries, census data and regulator lists give you a number someone else can verify.
Multiply by realised annual spend, derived from your own pricing or from published prices of close substitutes. Write the arithmetic into the deck. A reviewer who can reproduce your number in a spreadsheet will argue about the inputs rather than dismissing the conclusion.
Narrow to SAM with stated exclusions
SAM is TAM minus what you cannot reach. Be specific about the filters: single language support, one regulatory jurisdiction, a minimum customer size below which the economics break, a channel that only touches part of the population.
Listing the exclusions demonstrates you understand the market's structure. A SAM that is 90% of TAM usually means the exclusions have not been thought through.
Derive SOM from capacity, not ambition
SOM should fall out of your own operating plan. How many customers can the sales motion acquire per month at the stated CAC, given the hiring plan? Compound that over the plan period, apply your churn assumption, and you have a defensible figure.
If your bottom-up SOM and your revenue plan disagree, one of them is wrong. Investors will find the gap.
Four sanity checks reviewers apply
| Check | What it catches |
|---|---|
| Is TAM reproducible from cited sources? | Numbers borrowed from an unrelated category |
| Does SAM name its exclusions? | Unreachable segments counted as addressable |
| Does SOM match the hiring and CAC plan? | Revenue projections with no acquisition mechanism |
| Do the largest incumbents' revenues fit inside TAM? | A market sized smaller than its existing players |
When the honest number is small
A modest, well-derived market is a better position than an inflated one. Small verified markets get funded when the wedge into a larger adjacent market is credible and stated. Inflated markets get funded rarely and diligenced brutally.