Need to raise funding but having difficulty convincing investors? Did you do the TAM, SAM, and SOM? Your investor has just asked you to provide TAM, SAM, and SOM?
Taking a new business off the ground is an exciting but challenging experience for every founder, or investing in a new business is full of risk with hard to compare business plans and elevated pitches for every investor.
Just having a great Minimum Viable Product (MVP) out of the box would not be enough. It is equally important to present the feasibility of your product or service through accurate market size numbers in your business plan to win investor trust.
Why is it so important to include accurate Market Size in the business plan or investor deck?
The most daunting task is to get investors to believe that your business idea is economically feasible, and why should they support it with funding. Since their money would be at stake, investors would only think of the numbers you present to them regardless of the personal throws you're about to make.
Investors are mainly interested in the following ultimate results that require scrutiny in market research,
- To generate a guaranteed return on their investment,
- To show that stated market share is profitable, and
- To ensure that the expected market share is large enough to accomplish stated returns
This can best be described by developing excellent Market Size metrics as a part of your Revenue Potentials Predictions in your Business Plan.
Ok, now let's look at why and when they matter.
Here are three magical metrics to help you determine the value and viability of your entrepreneurial idea.
Total Addressable Market (TAM)
TAM stands for the total addressable market, also known as the total available market, and refers to the total market demand for a product or a service. It allows potential investors to estimate the maximum revenue a business can generate by selling a service or a product in a specific market.
Two main methods can be used to calculate TAM – top-down and bottom-up approaches.
- The top-down approach uses industry research from such companies as Forrester, Gartner, and others, which can be obtained from open sources to estimate the population that comprises the target market. Then you should logically apply geographic, demographic, and economic assumptions to eliminate irrelevant segments and narrow down the large part to a specific market segment.
- The bottom-up approach is more reliable because it lies in primary market research. You should count the total number of customers in a market by adding up the number of customers that each company has and multiply that number by the average annual customer revenue in this market.
TAM reflects the full market potential, but realistically, no company can ever capture 100% of the total available market.
TAM is a relevant metric among many others for you to cover when building a sustainable business model. Please don't get lost in the metrics and make sure you understand them correctly.
Why is TAM crucial for your business plan?
Although unattainable, TAM still retains excellent importance because it helps determine,
- The total market size of your product/service
- Possible business growth
- The competitiveness of your product/service
- The untapped customer segments left untouched by their rivals or their rivals
- Ideal revenue, a company can achieve when it is in full swing!
The chances are that you are not the only business on the market, and part of the market share would be captured by them already. So, customers who need and can pay for their product/service would be your ideal market, called SAM or useful available market.
Serviceable Addressable Market (SAM)
SAM (serviceable addressable market or serviceable available market) is the part of the total addressable market that can be reached. SAM can be defined as the total sales volume of a particular product (or service) that can be sold by all vendors on the market within a specific territory that your company can service. Usually, there is already some competition that will help you root your estimations in something real. It's the portion of TAM you will target.
Comparing TAM vs. SAM, we should note that they are both addressable markets.
What is the addressable market? It's a marketing concept that refers to specific groups of people who might be interested in the product or service you are offering and who can potentially become your customers in the future
Why is SAM crucial for your business plan?
SAM determines the share of revenues that can be obtained in the short and medium-term. It helps you discover your niche market by differentiating your customer segment based on demographics, such as age, gender, income levels, technology, geography, etc.
This is important to remember as it doesn't matter how big your TAM is if you don't have a mechanism to grow your SAM inside that TAM.
McDonald's had the Speeded Service System, Facebook had its software-based network effect, and Uber had a fleet management innovation.
Those mechanisms are why these are globally known companies rather than merely a local burger joint, a Harvard networking site, or a taxi cab company.
So that's the audience you should be able to serve best, assuming you could reach them
Serviceable Obtainable Market (SOM)
It will be difficult for a startup to penetrate the entire SAM, so you will need to set realistic goals and target a subset of SAM that you can realistically reach during your business's first few years. That's SOM or serviceable obtainable market. Being your short-term goal, SOM is the one that matters the most. If you seek funding, your investors will expect you to have a realistic objective and judge you on your ability to achieve that objective.
To estimate your SOM correctly, look at the competition in your precise niche and the total niche volume. Compare your product, marketing, pricing, and sales plans to the competition to estimate which part of the niche you may get.
Why is it important to calculate TAM, SAM, SOM to win investor's trust?
The more you can prove that your SOM is attainable and more straightforward, the more it will increase your investors' confidence, and you will be able to win their trust with the approach of more accurate business plan calculation.
When and why you must include TAM SAM SOM in your business plan?
Put yourself in the shoes of investors. It is necessary to provide your investors with a target return that implies both a de-risk early investment (i.e., understand with as little capital as possible if the startup has a market) and investment in opportunities that offer considerable upside potential (i.e., huge market size).
The SOM and SAM help reduce the investment risk, while TAM allows you to assess the upside potential. The Servible Market is your short-term goal and, therefore, the one that matters most: if you fail to succeed on a fraction of the local market, chances are you will never capture many parts of the global market.
As an investor, they expect you to have a realistic goal, and they will judge you on your ability to achieve that goal.
Why do investors care for your SOM vs. SAM number in your business plan?
For the investor, the ability to reach your SOM means that he will not lose his shirt. In this context, SAM acts as a good business plan health check to assess the likelihood of achieving the implicit Serviceable Obtainable Market And as a substitute for your company's short-term growth potential.
If you can deliver SOM on time, you are capable and credible, and you might be able to increase market share and achieve greater SAM penetration that would provide a good return on their investment.
How will the most accurate figures on TAM, SAM, and SOM help investors determine how much they can invest in your company?
Why is it essential to get the right definition of your company's business potential to get the right TAM?
Let's take the example of Uber. Uber's play wasn't just to be a taxi company. Internally, Uber's market was seen as every meter traveled. This means taxis, delivery services, haulage, and more. We're seeing this now with UberEats and UberFreight, which is currently expanding across Europe.
The TAM for Uber is not just the size of the global taxi market, but transportation more generally.
When you're trying to understand your total addressable market, you need to think of how you define your company and where you believe it can go.
What factors should you focus on in your business plan to show investors how to maximize SOM?
The following factors determine why customers would choose you over others that you can use to your advantage to maximize SOMs,
- Unique value proposition
- Better Prices
- Personalized services
- Outstanding customer service, etc.
What is the most crucial information that you must accurately calculate to get your SOM size accurate?
- Pricing plans
- Profit margin
- Frequency of translation
- Amount of the transactions in your industry.
The number of customers you plan to attract within a certain period – could be a few months or one year and so on. For the Bottom-up approach, as per the above directions, you would need
TAM SAM SOM examples
TAM, SAM, and SOM represent different subsets of the market. Are you still confused about these metrics? Let's take a look at the TAM SAM SOM example.
Let's say you are a tech startup launching new CRM software. Your TAM will be the total CRM software market worldwide. Any person that interacts with customers could buy your new product. But if your CRM software is only in English and you are targeting tech companies with sales teams, your SAM will be people from sales and customer services of tech companies worldwide that use the English language for their business. Your SOM will be a realistic market share that your company can capture in the first 2 or 3 years after launch.
This part of the analysis is harder to calculate because you should consider the features of your CRM software and customers' needs. You'll need to narrow your market one more time and, for example, target small and medium sales teams with simple selling cycles
Let's take a look at an even more specific TAM SAM SOM example for my company Lean-Case.
- Markets for verticalized SaaS applications such as Lean-Case are new global markets, but eventually high volume with high growth rates. We estimate that our TAM – the global potential market – addresses 60M companies with 845M users which today use Excel as well as cloud CRM and accounting services.
- Assuming a TAM penetration of only 1% of Excel, 2% of CRM and 10% of accounting users, the SAM (market segment which can be targeted by Lean-Case) results in 12.5M users in 600k companies.
- With a 1% SAM-penetration, Lean-Case will have a SOM (realistic market portion we can capture in 4-5 years) of 125k users in 6-10k companies. Given the large number of consulting firms, corporate innovators and accelerators in Europe, we estimate the European share of the SOM to be around 50%. Applying an average revenue of €300 per user per year, we are looking at a large global €3.75B market (SAM) and a Lean-Case revenue potential of 37.5M (SOM).
As you see, TAM, SAM and SOM are the fundamental metrics in business planning and one of the decision criteria for investors. They will be your starting point in building a sustainable business model. There are much more factors you need to consider when preparing for the next investment raising round. The best way to keep track of all the important criteria and ensure that your presentation is convincing and not missing crucial elements is to use Lean Case. With the help of our system you easily develop comprehensive business models your investors will be grateful for.
How can you use Lean-Case to understand your funding needs based on the most accurate TAM, SAM, SOM numbers?
So we've seen what these different terms mean, and you've probably noticed that there are a whole bunch of other areas you'll have to research to build this all out properly.
At Lean-Case, we have carefully designed the following blueprints…
You fill in the necessary information in easy steps to get revenue potential calculated and then save that as a blueprint…
When you need to follow that process, you run the template as a checklist and follow it.
This means you have a standard process for how you approach TAM, SAM, SOM calculation – a process you can improve or iterate over time! But it also means you have a single instance record for everything you did when calculating the business plan most accurately. This way, nothing gets lost next time you come to try to do it.
Here is a load of related templates and checklists we have, which you can check out. It's free to sign up for Lean-Case, so you can add the Blueprint you like to your account, edit it, and start running the calculations most straightforwardly.
Download TAM SAM SOM Powerpoint Template for your Pitch Deck
Get the FREE Powerpoint Template
by: Eckhard Ortwein, CEO and Founder of Lean-Case
Comprehensive market research is always very crucial to address funding roadblocks. It should closely address the risks of investment and the potential of returns on investment to make a plausible claim before investors.
Have you struggled to try to understand your TAM SAM SOM? What have been the main hurdles you've faced in working out your markets? Let us know in the comments below!
With all the excitement that comes with starting a new company and gauging its industry's profit potential or forecasting a revenue goal for your business, you must remember to root these figures in reality.
If you don't, you could enter a market that doesn't have a large enough market size to convince investors to back you, or you could set an unrealistic revenue goal for your business and burn your employees out.
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