Market Sizing

How to Calculate TAM Size for a B2B Technology Product

Scalepath Staff
January 30, 2022

What is B2B TAM?

In the simplest terms, the total addressable market (TAM) for a B2B technology product is simply the number of customers who can get value from your product multiplied by the price they are willing to pay, without regard to competition or limitations your company may have. This is a view of your total market opportunity at a global scale (TAM).

Your B2B market sizing model should include two additional breakdowns: the size of the market you can service (SAM, or serviceable addressable market), and the size of your obtainable target market (SOM, or serviceable obtainable market).

We'll cover those simple calculations in this article. When you do your own market sizing model, you'll likely want to build a segmented model to show how the market is distributed across different geographies, market verticals, and business sizes. For that, download our free B2B TAM, SAM, SOM template.


How to Calculate Total Addressable Market (TAM)

Your TAM is the total revenue opportunity for your product or service globally.

Let’s look at how you’d calculate the bottom-up TAM of a new B2B SaaS product that’s sold for an annual per-seat price to a specific market vertical.

Finding the total number of businesses your product could address globally is the first step. You would then need to multiply that number by the average number of employees (or seats) that could potentially benefit from your product. Finally, multiply that number by the per seat price your market is willing to pay. The calculation looks like this:

TAM = Total Potential Customers x Seats x Price per Seat


Calculating your TAM will require layering in multiple data sources. You can likely find the number of total companies from a good market data source, but you may need to make assumptions about how many of those sell to other businesses - let’s say 50% conservatively. Additional data sources suggest that there’s an average of 40 employees per company in this market.

Your pricing strategy is based on a per seat price that decreases based on total seats purchased, so you need to find data that breaks down company segments based on the number of employees to factor this into your model. By breaking down your current pricing structure across varying company sizes, you find that your average sale price is $473. If you don’t have good product pricing data internally, you can often get this data through market surveys or competitive intelligence.


Example:

1,000,000 businesses in market globally

x 20 average seats/users 

x $188 per seat price

= $3.76B


Your TAM, in this case, is estimated at 1 million companies and $1.76 billion in available revenue. This is the largest possible measure of your market: it does not take into account things like what geographic segment of the market you can reasonably serve, your ideal customers, or your competitor’s market share.

For a more realistic view of your opportunity, you’ll need to calculate your Serviceable Available Market or SAM.

How to Calculate Serviceable Addressable Market (SAM)

Your SAM is the portion of the market you can actually reach, given the limits of the product, geography, demographics, or other limitations on your ability to service customers. 

Your SAM factors in:

  • What geographic regions are can sell in, due to language barriers, regulatory limitations, and other considerations
  • Product fit metrics that may impact potential reach (is your product an add-on to an existing app? Does it only work with certain software or hardware?)
  • Other factors that limit your market based on your business realities

For this example, let's assume you can only sell your product in five markets: the US, UK, Canada, Australia and New Zealand. You find that there are 400,000 businesses in these markets that could find value in your product. Notably, you wouldn't be able to serve a customer who came to you organically from another country.

Further, your product requires a specific piece of software to integrate with, and you find that 50% of these businesses already have that software.

These markets are a bit more mature than the overall market, so company size is a bit larger at 25

Finally, you can factor in your average per seat price and average seats per company to estimate your serviceable market size.


Serviceable Available Market

# Businesses in markets you can service

x product limitations

x Average # seats sold

x Annual price per seat

Example:

400,000 businesses in the US, UK, Canada, and ANZ

x 50% use required software

x 25 average seats/users 

x $188 per seat price

= $940 million

 

Your SAM, in this case, is estimated to be 400,000 companies and $940 million in available revenue.

While this is more accurate view of your market opportunity, this is still not fully representative of your immediate earning potential, as it assumes you can capture all of the serviceable market. This is where Serviceable Obtainable Market or SOM comes in.


How to calculate Serviceable Obtainable Market (SOM)

Your Serviceable Obtainable Market or SOM, is an estimate of what portion of your SAM could reasonably be obtained. This is your market share target.

While your SAM is based on your geos and product fit resulting in a $352M market, your SOM goes a step further by factoring in:

  • Demographic and firmographic details on your ideal customer profile (ICP)
  • Competitor market share and growth rate
  • Expected growth of the market
  • Your current distribution channels

While TAM and SAM are mostly a function of market forces, SOM is more of an outcome of your capabilities and focus. In this case, you are focused on 10,000 companies that are an ideal fit for your solution. These companies are larger still than those in your SAM, with an average of 50 users per company. The per-seat price is the same.

Serviceable Obtainable Market

# Businesses in target market

x Average # seats sold

x Annual price per seat

Example:

10,000 businesses in target market

x 50 average users 

x $188 per seat price

= $94 million

Your SOM is 10,000 businesses with $94 million in potential revenue.

SOM can serve as a gut check to see how much of the market you can capture at your current growth rates and capabilities, and if you can build a viable business here. If not, you may need to consider additional routes to market, partners, or funding to get where you’d like to be.

Using TAM for B2B

B2B market sizing is part art and science. No TAM model will be perfect, but the right insight gives you a direction and focus that can save you time and money later.

Want to build your own TAM? Consider downloading the free market sizing template or get access to Scalepath’s B2B total addressable market software, which leverages millions of data points and information about your business to map out your market size, growth dynamics, and best revenue opportunities.

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