Now that you have to present your market size to potential investors, you’re likely wondering what critical points you’ll need to focus on and how to pitch as confidently as possible. Simply put, it’s all about doing your homework.
Having a solid understanding of your market is crucial since it enables you to give your investors a notion on how much profit they can expect from your business in the future; that estimate is, by far, one of the key determinants in investment decision-making, whether you’re dealing with an angel or VC investors. A pitch deck without a market analysis isn’t worth a penny, and your credibility will plummet to zero in the eyes of investors.
But even if you recognize that properly assessing your market size is vital, how do you actually do it?
That’s where the TAM SAM SOM model comes in handy.
This valuable assessment method centers around estimating the actual immediate market and the future upside potential of your startup.
This article will help you understand the basic concepts of this method as well as the different approaches when it comes to applying it.
TAM SAM SOM: What is it?
The TAM SAM SOM model compares different cuts of the target market with the shares you can expect to capture within them. The acronyms stand for:
- TAM – Total Addressable Market
- SAM – Serviceable Addressable Market
- SOM – Serviceable Obtainable Market
The most common and clear way of depicting the model is through a stacked Venn diagram.
TAM – Total Addressable Market
Your Total Addressable Market basically refers to all the customers out there that could potentially find your product valuable and purchase it, regardless of whether you can actually target or sell to them at the moment.
The idea behind TAM is to show your investors the best-case scenario for your endeavor as well as the overall revenue opportunity that could be created in the market. This information gives your investors an understanding of the space available for expansion and makes the investment opportunity compelling.
A straightforward example would be a utility company operating across an entire continent without any competition, meaning that everybody on that continent would be its TAM (which, in this case, would also be the SOM).
While this example illustrates TAM, for obvious reasons, such a monopoly is hardly achievable.
TAM often encompasses a whole industry, like transportation, FMCG, construction, or another particular sector. Some founders have also targeted certain geographical locations (e.g., large areas like states, countries, and continents).
Try not to overstate or understate your TAM. Sure, it’s more convincing when it’s reasonably big, but don’t lose touch with reality.
SAM – Serviceable Addressable Market
There are certain constraints to every business’s market, whether they are due to geographical limitations, target audience demographics, or the niche in which the business has chosen to operate. The Serviceable Addressable Market accounts for these limitations in providing an objective estimation of the portion of the market that you can target with the available resources.
Your SAM is the share of your TAM (typically around 1-10% of it) that is going to be your focus. You can also think of it as a vision of your company’s direction over the next 10-year period.
SOM – Serviceable Obtainable Market
Now, you cannot possibly win over your entire SAM (unless you’re a complete monopoly). If you claim otherwise, investors will not buy it.
Your Serviceable Obtainable Market, on the other hand, is the actual customer base that you expect to reach – a figure carved out of your wider SAM. For example, your SOM might refer to a certain city or a narrow niche within an industry.
In finding your SOM, you consider your competition and the available resources to evaluate the audience that is interested in buying your product in the immediate future.
You could also view it as your development prognosis for the next 1-3 years.
How to calculate a product’s market size using TAM SAM SOM
There are two ways to calculate market size using TAM SAM SOM: top-down and bottom-up.
The top-down approach involves thorough research and a great deal of estimation.
You start with the macro-data on your assumed TAM, which is available on the internet – for instance, a valuation of the entire transportation industry. The next step would be to filter it through your customer profile (i.e., age, sex, and geography), narrowing it down to your SAM. Then, you would consider the constraints to you reaching your entire SAM, whittling it down to arrive at your SOM.
This method is prone to high reality/expectation deviation, as it heavily relies on the founders’ assumptions.
As a result, bottom-up is the preferred method.
In this case, you start with your SOM, whether it’s based on your own historical data (if you have it) or on your immediate competitors’ numbers. Multiplying your approximate number of customers by the average contract value (ACV) will give you an idea of your SOM’s monetary value. Keep building on it by assuming what industries or geos you can conquer later on, which will lead you to your TAM.
If you don’t have any historical data, it might be a good idea to go out into the field to survey your potential customers (or contract an agency to do it for you). This research will provide you with the most realistic percentage of interested customers in your assumed market.
Examples of market size calculation
Uber’s use of a bottom-up approach provides a great illustration of how SOM, SAM, and TAM overlap and their potential for supporting expansion. Let’s take a look at how is market size calculated for this company:
- Uber started in 2009 as a ride-sharing service with the aim of becoming a market leader in NY and San Francisco and reaching $1 billion in annual revenue (SOM).
- Their SAM would be the Taxi and Limousine sector in the US, which was valued at $4.2 billion in 2007.
- The TAM that Uber envisioned was the entire global transportation industry, which encompassed $5.7 trillion worth of services in 2007.
You can see the thinking behind these overlapping market concepts, where each constitutes a share of a bigger pie and makes room for growth.
Let’s look at a hypothetical example of how to find market size:
- Tom wants to start a tin canning service since his town is famous for its craft breweries. Research shows that there are 10 breweries in the town, producing 50 tons of beer annually.
- Tom briefly surveys the brewery owners and finds out that only 50% of them would be interested in his service. His price for canning one ton of beer is $5,000, which results in a SOM valued at 50 × 0.5 × 5,000 = $125,000.
- He estimates that, within five years, he will be packaging beer state-wide, producing around 300 tons of beer. This means his SAM would be 300 × 5000 = $1,500,000.
- His TAM would be the entire canned drink industry in the country, which constitutes two million tons or $10 billion.
Let’s take a look at how to calculate market size for a B2B CRM software company using the top-down approach:
- The TAM would be the global CRM industry, which is worth about $70 billion (according to open data from the internet).
- The solution is tailored to companies whose annual revenue exceeds $200 million. Further research shows that the number of such companies is around 50,000 worldwide. The average contract value is $300,000.
- Multiplying the number of companies by the ACV will give us the SAM: 50,000 × $300,000 = $15 billion.
- As for their SOM, the company may decide to focus on Fortune 5000 companies, which would set their SOM at $1.5 billion.
Summary
Knowing how to calculate TAM SAM SOM is an important aspect of writing a successful pitch deck. These figures give you a clear view of your startup’s immediate goals and of the space available for its future growth. Finally, it helps to secure funding by convincing your investors that the market you are planning to conquer is large enough to give a high return on investment.