An estimate of a business TAM/TOM/SOM
Q 1: Pick a business or a service and estimate what their TAM/TOM/SOM is. e.g. MerryBiz TAM: Japanese labour market: 90 billion CAD SAM: Japanese back-office/administration labour market: 79 billion CAD SOM: Market size of Back-office/administration labour that can be done from home: 6,000 million CAD
Q2: Pick a business, service or product and describe the target audiences in any way other than demographics. e.g. Harry Potter
The novel lover: Those who read all the J.K. Rowling books. They come alone or with one more friend. After the movie, they would spend a long time in a cafe and they would talk in detail.
The blockbuster fun group: Just a group of friends finding something fun to spend time with their palls. They buy a lot of popcorn/drinks
The nerdy fan: They come alone or with a small group. They come several times to watch the movie. They buy a lot of merchandise after the movie
When doing their market analysis start-ups often refer to TAM, SAM, and SOM but what do these acronyms mean and why are they useful to investors when assessing an investment opportunity?
TAM, SAM and SOM are acronyms that represents different subsets of a market.
Still confused about TAM SAM SOM? Let’s take an example.
Let’s say you are starting a fast food chain. Your TAM would be the worldwide fast food restaurant market. Potentially, if you were present in every country and had no competition you would generate TAM as revenues.
Sorry but that’s not going to happen!
Let’s be more realistic. You are starting your restaurant chain in two cities where the demand for fast food can be estimated based on: the population, their food habits, and the revenues generated by fast food restaurants in other cities having similar demographics.
That is your Serviceable Available Market: the demand for you type of products within your reach. In other words if you were the only fast food in town you would generate revenues of SAM.
Now you are probably not the only fast food in town…
So realistically you can hope to capture only a fraction of your SAM. Most likely you will attract fast food aficionados living or working close to your restaurants and a fraction of the people located further away that are willing to give your chain a try for the sake of fast food diversity. This is your SOM.
Ok, now let’s look at why and when they matter.
Put yourself in an investor shoes. You need to deliver a target return to your own investors which implies both de-risking the investment early (i.e. figuring with the minimum possible of capital if the start-up has a market) and investing in opportunities which offer substantial upside potential (i.e. huge market size).
The SOM and SAM help de-risking the investment while the TAM enables to assess the upside potential.
The Serviceable Obtainable Market is your short term target and therefore the one that matters the most: if you cannot succeed on a fraction of the local market chances are that you will never capture a large part of the global market.
As an investor I expect you to have a realistic objective and I will judge you on your ability to deliver that objective.
To be realistic your SOM needs to factor in:
For the investor the ability to reach your SOM means that he will not lose his shirt. In that context SAM acts as a good sanity check to assess the likelihood of achieving the market share implied by the Serviceable Obtainable Market and as a proxy for the short term upside potential of your business.
If you can deliver SOM in time then you are capable and credible, and you might be able to increase the market share and reach a more important penetration of the SAM which would deliver a good return on investment.
And then comes the Total Available Market.
Once you have demonstrated your ability to penetrate a local market and de-risked the investment, the investor can start looking at how you can expand and increase the company’s penetration within the TAM.
Let’s illustrate this with a numerical example. You come to pitch an investor who has a target return of 10x. You are seeking a £250k investment in exchange for 20% of the start-up’s equity.