TAM, SAM, and SOM

Picture this. You’re presenting your startup pitch deck in front of investors. You have all of 10 minutes. You just presented the TAM, SAM and SOM slides.

There’s silence and you’re about to move onto the next slide about your team, and your ask Before you can move on,  one of the investors speaks up and says,

“Can you go back to that slide again? Let me see those numbers…..I’’m not convinced these TAM, SAM, and SOM projections are realistic. Can you walk me through your assumptions?”

If you’ve made pitches in front of investors, you’ve certainly been in this situation. Sometimes, you can explain your numbers swiftly and move on. Other times, you get caught in a long debate about the assumptions. For those who are new, TAM, SAM and SOM are some of the most important data points that you’ll be presenting to investors as a startup founder. They are also the guiding star of your business. If you don’t know what TAM, SAM, and SOM, are, read on.

Introduction to TAM, SAM, and SOM

TAM, SAM, and SOM are essential metrics that help businesses and investors grasp the potential market size and revenue opportunity for products or services. Understanding these metrics is crucial for strategic planning, resource allocation, competitive analysis, and setting realistic revenue targets.

• Total Addressable Market (TAM): The total revenue opportunity available if a business captured 100% market share in its intended market.

• Serviceable Addressable Market (SAM): The portion of TAM that a business can realistically serve with its current product offerings and market reach.

• Serviceable Obtainable Market (SOM): The market share a business realistically expects to capture within its SAM, considering its competitive position and market dynamics.

Why TAM, SAM, and SOM are Important

TAM, SAM, and SOM are fundamental in a startup pitch deck for several reasons:

• Market Potential Assessment: These metrics provide insights into the potential market size, enabling businesses to make informed strategic decisions.

• Investment Decisions: Investors use these metrics to gauge a startup's potential before committing funds.

• Product Development and Market Entry: Understanding market size aids in decision-making regarding product development and market entry strategies.

• Competitive Analysis: These metrics offer a perspective on a business's position in the market relative to competitors.

• Sales and Marketing Planning: Knowledge of the target market size helps in crafting effective sales and marketing strategies.

Tools and Resources for Market Sizing

Numerous tools and resources are available for market sizing, ranging from industry reports, publicly available data to  market research, customer surveys and custom interviews. These tools aid in applying both top-down and bottom-up approaches to calculate TAM, SAM, and SOM. If you’re starting out, focus on getting publicly available data. Don’t try to pay for custom data. That’s not where your limited finances should be spent.

Calculation Methods: Top-Down, Bottom-Up and Value-Theory

There are three primary methods for calculating TAM, SAM, and SOM: top-down, bottom-up and value-theory, each has its own advantages and limitations.

• Top-Down Approach: Begins with a broad market overview, narrowing down to target market segments using secondary data sources.

• Bottom-Up Approach: Starts with detailed analysis of target market segments, building up to estimate the TAM, SAM, and SOM using primary data sources.

• Value-Theory Approach: Based on how much a customer is willing to pay for an improved product. This assumes that the new offering does not fit within the existing paradigm using market research, surveys, or analysis of similar offerings in the market. 

Marketing & TAM, SAM, and SOM

In the beginning, you should be focused on marketing to SOM only. You have finite dollars available for lead generation and marketing. There is no possibility of reaching TAM or SOM. Not even the most successful companies can own TAM (i.e. Apple, Google, Amazon don’t own 100% of the market.) No company will try to market to the entire universe. Niched or segmented approach is the way to go especially when you’re starting out. 

Understanding and calculating TAM, SAM, and SOM are crucial steps in the journey of launching and growing a successful business.

For more, please visit the-startupideation.com