Serviceable Addressable Market (SAM)

What is the serviceable addressable market?

Serviceable addressable market (SAM, in German bedienbarer Markt) denotes the part of the total addressable market (TAM) that a company can actually serve. The limits are set by its current offering, the regions in which it operates and the sales channels available to it. It is stated as the annual revenue that would arise at a market share of 100% within these limits. The term serviceable available market is used as a synonym.

The SAM is the middle level between the TAM and the serviceable obtainable market (SOM), the part that can actually be won in a defined period. The SAM appears in the market chapter of the business plan and pitch deck and connects the order of magnitude of the total market with the revenue plan. In funding rounds from the Series A, the first larger round with institutional investors, investors pay particular attention to it. It shows which market is reachable without further product development and which investment would enlarge it.

Calculating the SAM: from the TAM to the serviceable market

The SAM arises by reducing the TAM by all customers that the company cannot serve today. It is calculated like the TAM from the number of customers times the price per segment (bottom-up market sizing), only with the narrower set of customers.

Formula: SAM = customer units of the TAM × share region × share segment × share technology × share sales channel × average annual revenue per customer unit

The narrowing follows the actual limits of the offering, not a desired target group. Four kinds of filter are usual:

• Region, language and legal framework: countries in which the product is available in the language and meets the legal requirements, for example rules on data storage, billing or approval.
• Customer segment: size classes, industries or organisational forms for which functional scope, price and implementation effort fit. The basis is the ideal customer profile (ICP).
• Technical prerequisites: system landscapes to which the product can be connected, for example certain ERP systems (integrated enterprise software) or machine controls.
• Sales channel: customers who can be reached through the company's own direct sales, through partners or through online sign-up. A company that sells only directly cannot count customer groups that buy only through tenders or systems integrators in the SAM.

Each filter needs a justification and, where possible, a source. Each share relates to the set remaining at that point: the share of mid-sized businesses is to be determined among the businesses of the target region, not worldwide. Anyone who applies a worldwide share to a single region assumes that the size structure of the businesses there is the same as the world average. This is seldom the case.

The SAM as a management variable

Unlike the TAM, the SAM changes with every product and sales decision. A further language version, adaptation to the legal situation of a further country, an additional interface or a new partner channel shift the boundary between TAM and SAM. The SAM thus becomes the calculation basis for the use of funds of a funding round, that is, for the question of what the capital raised is used for. Each planned investment can be measured by how much it enlarges the serviceable market and what this enlargement costs.

Conversely, an SAM that is too small can indicate an obstacle to growth. As a rule of thumb, if planned revenue reaches a double-digit percentage of the SAM after a few years, the plan must explain how this penetration is to succeed against existing providers. Alternatively, the SAM must be extended through new segments. For the equity story, the growth rationale put to investors, the order in which extensions are opened up is therefore also important.

Review of the SAM in the pitch deck and due diligence

On first reading the pitch deck, investors check whether the filters between TAM and SAM are named. At the same time, they check whether planned revenue makes up only a small part of the SAM. In the subsequent review before signing a contract (due diligence), they reconcile the SAM with the actual sales data. They check whether the segments of the SAM match those in which the company wins customers today. If the customer base or the sales pipeline (the list of open sales opportunities) contains many customers outside the SAM, the delimitation is too narrow. If all customers come from a small part of the SAM, it is probably too wide. Finally, they lay each filter beside the product status: an interface that is only planned does not belong in today's SAM.

A second point of review is the sources of the customer numbers. Verifiable are official business statistics by industry and size class, trade association figures, commercial register and company databases and the company's own sales data, in each case with source and reference year. Estimates without origin are replaced by the investor with its own research; if its result differs, the whole derivation of the market is up for discussion.

Worked example: deriving the SAM from the TAM

Hypothetical example market, the same as for the TAM: software for maintenance planning in manufacturing plants, TAM 400,000 plants worldwide at an average annual value achieved of EUR 12,000, that is, EUR 4.8 billion. All figures are freely chosen. The product is available only in German, tailored to plants with 50 to 1,000 employees and has interfaces to a selection of widespread ERP systems.

• Region filter: plants in Germany, Austria and Switzerland: 30,000
• Size class filter: of these with 50 to 1,000 employees: 18,000
• Technology filter: of these with an ERP system for which an interface exists, two thirds: 12,000
• SAM: 12,000 × EUR 12,000 = EUR 144 million a year, that is, 3% of the TAM
• Planned extension: interfaces to the remaining ERP systems of the target group open up the remaining 6,000 plants
• SAM after the extension: 18,000 × EUR 12,000 = EUR 216 million, that is, EUR 72 million or 50% more

This yields a verifiable statement for the use of funds: developing the interfaces enlarges the serviceable market by EUR 72 million. Whether the investment pays off is not answered by the SAM alone. That depends on how many of the additional plants sales can actually win in the planning period, and that is shown only by the SOM.

Distinctions: SAM, ideal customer profile and market volume

• Ideal customer profile: describes the characteristics of the customers that fit the offering best. The SAM counts how many organisations have these characteristics and values them at the price.
• Market volume: the spending actually made by all customers with all providers. The SAM, by contrast, is a potential value and includes customers that do not yet buy a solution today.

Common mistakes

• SAM equal to TAM. Anyone who names no restriction claims to be able to sell worldwide without adapting to language, law and system landscape.
• Planned capabilities counted in. Language versions, approvals or interfaces that are still to be developed belong in a separately shown extension, not in today's SAM.
• Sales channel forgotten. Customer groups that buy only through tenders, framework contracts or systems integrators cannot be served without this access.
• Shares from the wrong reference group. A worldwide share of mid-sized businesses applied to a single region distorts the result if the size structure there is different.
• Average price without segment reference. If the prices achieved differ greatly by customer size, a single average price is permissible only if it is derived from the expected customer structure.
• No updating. An SAM that is not recalculated after a product extension underestimates the market and deprives the equity story of a verifiable argument.

Frequently asked questions

How is the SAM calculated?

Serviceable customers times average annual value per customer. The serviceable customers result from filtering the customer number of the TAM successively by region, customer segment, technical prerequisites and sales channel. In the worked example, 12,000 of 400,000 plants remain; at EUR 12,000 each, that gives EUR 144 million.

What is the difference between SAM and TAM?

The SAM is the subset of the TAM that the company actually reaches with its current offering. The TAM, by contrast, comprises all customers with the need, regardless of language, region, system landscape or sales channel. One level further down is the SOM, the part of the SAM that the company wins in a defined period. TAM and SAM are potential values; only the SOM is a planning variable.

How large should the SAM be in relation to the revenue plan?

Large enough that planned revenue at the end of the planning period makes up only a small part of it. If the plan envisages a double-digit percentage of the SAM after three to five years, it needs, by the usual rule of thumb, a special justification, such as a proven lead over existing providers. Often in this case the delimitation is too narrow or the plan too optimistic.

How is the SAM calculated for a market that is only emerging?

Via today's substitute. The organisations that solve the problem in another way so far are counted, for example with spreadsheets, service providers or their own staff. What is valued is what they spend on it or what a better solution saves them; the price applied should be supported by first customers or pilot contracts.

Do existing customers count towards the SAM?

Yes. The SAM comprises all serviceable customers, regardless of whether they are already customers of the company or of a competitor or use no solution yet. The share of the company's own customers in the SAM is a penetration metric that investors track in later rounds.

The Roemer Capital view

For Roemer Capital, the SAM is the figure on which the use of funds of a funding round can be anchored. In preparation, Roemer Capital determines with management which filters apply today. It shows each planned extension separately, with its development costs and the point from which it enlarges the serviceable market.

In the financial model, Roemer Capital uses the same segments, prices and customer numbers for the SAM as in the revenue plan. This consistency matters more than the size of the figure: investors lay the market derivation and the plan side by side in the review, and every deviation between the two costs time in the process.