Understanding TAM SAM SOM

Introduction

This tutorial will help you understand the concepts of Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). These metrics are crucial for startups seeking investment, as they illustrate market potential and opportunity. By the end of this guide, you will be able to define, research, and present these market sizes effectively.

Step 1: Understand Total Addressable Market (TAM)

TAM represents the total revenue opportunity available if your product or service achieved 100% market share.

• How to calculate TAM:

  • Identify the broadest market for your product.
  • Use industry reports, market research, and surveys to gather data.
  • Calculate TAM using one of the following methods:
    • Top-down approach: Start with the overall market and narrow down based on your product specifics.
    • Bottom-up approach: Estimate revenues based on your pricing model and potential customer base.

• Practical Tip: Look for reliable sources like industry reports or market research firms to ensure your TAM figures are accurate.

Step 2: Define Serviceable Addressable Market (SAM)

SAM is the portion of the TAM that is targeted by your products or services within your geographical and demographic reach.

• How to calculate SAM:

  • Identify the segments of the TAM that you can realistically serve.
  • Assess factors like competition, regulatory environment, and market trends.
  • Use market segmentation to refine your target audience.

• Practical Tip: Create customer personas to help visualize your target market segments and tailor your approach accordingly.

Step 3: Determine Serviceable Obtainable Market (SOM)

SOM represents the portion of the SAM that you can realistically capture in the near term.

• How to calculate SOM:

  • Analyze your current market presence, resources, and capabilities.
  • Consider your marketing and sales strategies to estimate the share of the market you can obtain.
  • Use realistic assumptions and growth rates based on historical performance or comparable companies.

• Practical Tip: Keep your SOM estimates conservative to avoid overpromising to investors.

Step 4: Research and Document Your Findings

Once you have defined TAM, SAM, and SOM, document your findings clearly.

• How to document:

  • Use graphs or charts to visually represent your market sizes.
  • Include data sources and methodologies for transparency.
  • Prepare a presentation that succinctly explains each market size and its significance.

• Common Pitfall to Avoid: Ensure all data is current and relevant; outdated information can mislead investors.

Step 5: Presenting to Investors

When presenting to potential investors, clarity and confidence are key.

• Presentation Tips:

  • Start with a clear overview of your market definitions.
  • Use visuals to illustrate your points effectively.
  • Be prepared to answer questions regarding your market assumptions and calculations.

• Real-World Application: Tailor your pitch to highlight how understanding TAM, SAM, and SOM will guide your business strategy and growth.

Conclusion

Understanding and articulating TAM, SAM, and SOM are critical skills for any startup seeking investment. By accurately defining these markets and presenting them clearly, you will increase your credibility with potential investors. Next steps include applying these concepts to your business plan and practicing your presentation skills to communicate your market understanding effectively.