TAM SAM SOM. No, this is not a tongue twister nor is it a dance or the beginning of a nursery rhyme. These three little words, however, just like a nursery rhyme, should stick in your mind because they can help you discover your startup’s market potential and attract more investors through effective data-driven strategies. Let’s get to know them better.
TAM, SAM, and SOM: what are they?
To understand the impact that TAM, SAM, and SOM have on the business model, you obviously need to know, first of all, what these three acronyms stand for. Let’s proceed in order.
Total Addressable Market
The acronym TAM stands for Total Addressable Market and indicates the total demand for a given product or service in the market or, in other words, the total revenue the startup could achieve by selling the product or service to every single potential customer.
The larger the total market, the more chances there are to scale it; at the same time, however, a market with these characteristics tends to attract a large number of companies, with the result that competition will be higher. A less large market, on the other hand, has less competition, but is also less attractive. A useful hint for you: investors tend to prefer a large total market.
Served Available Market
The acronym SAM stands for Served Available Market, meaning the potentially available market for a given product or service (or, to put it another way, the potentially attainable market for a startup with that given product or service).
Compared to the total market, it has constraints, which may be, for example, territorial constraints: for a company operating locally in Italy, the TAM is the world market while the SAM is represented by the Italian market.
Serviceable and Obtainable Market
The last acronym (SOM) denotes the Serviceable and Obtainable Market, which is the market that the startup can realistically aspire to reach with the skills and tools it has at its disposal and in the context in which it operates.
The difference with the SAM is that while the SAM represents the segment of TAM that your startup can serve, the SOM is the segment that you are realistically able to reach, based on your resources and market conditions. Precisely because of this last aspect, you need to consider that the SOM can change over time, so it is important that you review it periodically to adapt to its evolution.
Importance of TAM, SAM, and SOM for startups
Before you understand how you can calculate TAM, SAM, and SOM, it is critical that you are clear about the importance of these three acronyms for your startup (and for startups in general).
Peter Drucker once said:
“The best way to predict the future is to create it.”
Understanding and making the best use of TAM, SAM and SOM gives you a clear idea of your startup’s market potential and your opportunities for growth and revenue. Not only that, these metrics also enable you to set more realistic goals and identify the most effective strategies for achieving them (including, for example, when launching new products or services in the market or entering new markets).
And that’s not all: TAM, SAM and SOM also enable you to find funds and investors more easily. The latter, as pointed out earlier, are attracted to broad markets, but also, and more importantly-it should be emphasized, to markets that not only potentially broad, but also reachable.
Showing prospective investors a pitch deck with an accurate TAM, SAM and SOM calculation inside makes the difference between a prepared entrepreneur and an improvised one. To delve into this, however, there is time: now, in fact, is the time for you to understand how to perform TAM, SAM and SOM calculations.
Calculate TAM, SAM, and SOM
You should know, as of now, that there are several methods for calculating TAM, SAM, and SOM, including so-called Top-Down and Bottom-Up methods.
Before delving into these two methods, however, it should be clear to you that, for calculating TAM and SAM, you can collect and analyze data and reports that you can find on the web for free or for a fee (you can also use external market research agencies)), while for calculating SOM you have to resort to information and forecasts “internal” to your startup because the focus, in this case, is inevitably on the concrete potential of the startup itself.
Top-Down and Bottom-Up Method
The Top-Down Method is used to calculate a startup’s market size, including TAM, SAM, and SOM. This approach is based on secondary research, i.e., data from large international organizations, such as the UN or World Bank, and takes a larger market size as a reference initially and then gradually reduces it to that of the target market. Demographic and geographic filters are applied to obtain more realistic and accurate estimates.
Different is the perspective of the Bottom-Up Method, which, starting from primary research, first considers the local market size and then multiplies it to obtain a more accurate estimate by extending it “upward.” By taking into account local factors that can influence the size of the potential market, this approach is particularly useful for startups active in very specific market niches.
Practical example and real application
A practical example of a real-world application of the Top-Down Method is that of Uber, which used this very approach to calculate the size of its market and plan its strategy. You will find out more in the next section how.
Case Study: Uber and Airbnb
A classic Case Study of the calculation of TAM, SAM, and SOM, as mentioned earlier, is that of Uber: its TAM (i.e., the global transportation industry) was valued at $5.7 trillion, while SAM (i.e., the U.S. cab and limousine market) $4.2 billion. While Uber did not clearly define its SOM, the company’s goal was to reach $1 billion in revenues in one year. In 2019, actual revenues were $14.15 billion.
Another recurring Case Study when discussing TAM, SAM, and SOM is that of Airbnb. Its TAM was estimated at 1.9 billion trips worldwide, and the company quantified its SAM at 532 million online trips. For SOM, on the other hand, the company estimated that it could access 10.6 million trips, and multiplying this estimate by the average rate resulted in revenues of about $200 million between 2008 and 2011. A few years later, in 2017, Airbnb’s revenue estimate reached $2.6 billion.
Presenting TAM, SAM and SOM to Investors
We have pointed this out repeatedly: TAM, SAM, and SOM are very important for investors who, precisely because of these metrics, can better assess a startup and, in particular, its market potential and the goals (and revenues) it is capable of achieving.
Creating effective presentations
If you want to present a project effectively in the eyes of investors there are two mistakes you absolutely must not make when presenting your startup’s TAM, SAM, and SOM: presenting a TAM that is too small (remember that investors are attracted to large markets because, based on their reasoning, you are more likely to build a large company within a large market) or a SAM that is too large (by doing so you show that you are not able to really know market structure and dynamics).
Communicating potential value
There is one more aspect to consider before concluding this guide devoted to TAMs, SAMs, and SOMs: you must keep in mind that, in general, investors receive similar proposals referring to the same markets all the time. To stand out, then, you must have a unique insight concerning a particularly promising market segment. And you must know how to communicate it effectively.
To return to Airbnb’s case study, what made the difference for its funding was its ability to demonstrate that, within the very large travel market, there was an online, high-budget segment that could be tapped.
Having identified the market segment, it is also critical to best explain how you intend to target it. This is where the SOM comes in. The advice here is to tell investors your expected revenues on a three- or five-year basis, making clear your medium-term revenue target (which must be sufficiently large) and your first steps in your market entry strategy.
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