When you are starting a new business and are calculating its profit potential or are setting a revenue goal for your company when making a business plan, it’s crucial to root these figures. That’s why you need to perform a market analysis and assess the market potential for your products and services. In other words, you should start from TAM, SAM, SOM. These are the metrics that investors look at when making their investment decision.
Wondering what these abbreviations mean and why they are useful to investors when assessing an investment opportunity? Keep reading.
TAM stands for total addressable market, also known as total available market, and refers to the total market demand for a product or a service. It allows potential investors to estimate the maximum amount of revenue a business can possibly generate by selling a service or a product in a specific market.There are 2 main methods that can be used to calculate TAM – top-down and bottom-up analysis.
TAM reflects the full potential but realistically, no company can ever capture 100% of the total available market.We covered 1 of 3 metrics from the article. And there are dozens more for you to cover when building a sustainable business model. Don’t get lost in the metrics and make sure you calculate them correctly. Use Lean Case to develop the business models.
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by: Eckhard Ortwein, CEO and Founder of Lean-Case
SAM (serviceable addressable market or serviceable available market) is the part of the total addressable market that can be actually 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 is able to service. Usually there is already some competition in there 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 addressable market? It’s a concept in marketing 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.
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 the first few years of your business. That’s SOM or serviceable obtainable market. Being your short-term goal, SOM is the one that matters the most. If you are seeking funding, your investors will expect you to have a realistic objective and judge you on your ability to achieve that objective.In order 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 in order to estimate which part of the niche you may get.
TAM, SAM, and SOM represent different subsets of the market. Still confused about these metrics? Let’s take a look at 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 analysis is harder to calculate because you should take into account 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 Lean-Case.
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.
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CEO and Founder Lean-Case - Eckhard is a Serial Entrepreneur co-founding cyber-security startup accells acquired by Ping Identity and m-payment startup paybox acquired by Sybase/SAP. As a Business Angel, VC Partner and Investment Advisor, he has realized that turning business models into numbers is a major challenge and must professionalize.
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