To those who are not following the startup world TAM, SAM, SOM may sound like some strange foreign language. But for those involved in early stage investing these acronyms tell a lot about the startup seeking financing.
TAM, SAM and SOM all refer to different markets:
– TAM stands for Total Addressable Market;
– SAM stands for Serviceable Addressable Market;
– SOM stands for Serviceable Obtainable Market.
Total Addressable Market (or, Total Available Market) is the absolute maximum market size or potential revenue a company can achieve assuming no barriers, no competition, unlimited marketing and investment budgets. For a mobile app these could be all the smartphone users, for a new software — all laptop and desktop owners globally etc.
Serviceable Addressable Market (or, as it is sometimes called, Serviceable Available Market) is a subset of TAM that is usually defined by the chosen product niche. Depending on the product the limiting factors used to establish a nich can include geographical (city, coutry or a wider area), demographic (particular age or income segments), or behavioural (people sharing similar interests, for example, fitness fans).
Serviceable Obtainable Market is a realistic look at what share of SAM a business can reasonably capture in 3-5 years time, taking into account competition and other variables (presence, capacity, distribution etc.).
A few things that are worth noting:
– from the investor’s prospective TAM denotes the upside potential or the potential for scale;
– SOM and SAM help de-risking investment because they provide investors with the worst-case scenario modelling what would happen if only a small portion of TAM is reached;
– there are no hard rules as to how big TAM should be but international venture capital funds are said to prefer TAM that is over EUR 1 billion;
– it is very unlikely that SAM could equal or even approach TAM. That would require the ability (resources, reach and functionality) to serve all the potential customers there are globally. Different sources suggest different levels but it seems that a realistic SAM would be in the range of 1%-10% of TAM. This is often recommended as a good 10 year goal for any business;
– SOM is probably what matters the most because it refers to the short term market. If a company can’t succeed in capturing a fraction of the local market the probability of it conquering the global market becomes very low indeed;
– SOM serves primarily as a sanity check but nevertheless should be large enough to protect the investor’s downside. The upside will come from TAM.
MIDiA, a music industry blog, offers a very useful allegory that helps to memorise the basic relationship between the three markets:
– TAM is how big the pond you are fishing in is;
– SAM is how many fish there are in the pond;
– SOM is how many fish you are likely to catch.
Easy to remember even for those of us who are not into fishing, isn’t it?
This note was first published on Medium.com on 6 October 2023.
