Understanding Market Size, or Demystifying TAM, SAM and SOM
“How big is your target market?” is a question often asked by investors. Naturally, investors want to invest in large and rapidly growing markets. Most entrepreneurs hesitate when answering this question. What if they are far off from a VC’s idea of the size of a market? In addition, VCs will throw terms like TAM, SAM, and SOM at an entrepreneur in a rapid-fire fashion. There is no need to be intimidated by these acronyms. Here is a quick recap of what these terms mean:
- Total Available Market (TAM): This refers to the combined revenues (or unit sales) of all the companies in a specific market. Typically, an investor will want to know the TAM in the US, or North America, and the Rest of the World, and its growth over next five years. You need to be aware of the “1% of China” market fallacy. One percent may seem like a small and achievable level of market penetration, but you are not going to get 1% of China’s 1.3 billion people to buy your product in a single year. Similarly, you can’t take a random share of a population and call it your TAM. It is best to add up sales of leading companies in a specific geography or market segment to get a better idea of TAM. For example, to get a good idea of TAM for shoes, starting with adding up the sales of leading shoemakers like Nike, Adidas, Cole Haan, Clarks etc. would be a good start. Industry associations, like the National Shoe Retailers Association, are a great source of market data.
- Served Available Market (SAM): It refers to the share of Total Available Market that the companies providing a specific solution can fulfill. For example, if the Total Available Market for all shoes in the US is $20 billion a year, the Served Available Market for companies making running shoes will be a slice of TAM. Similarly, if you are developing a mobile app, you can be limited by the version of Android or iOS your app will run on. By definition, SAM is less than TAM.
- Share of Market (SOM): It refers to what percentage of SAM a particular company currently serves (or plans to achieve, in the case of projections). By definition, SOM is less than SAM unless a company is a monopoly with 100% market share.
You can visualize the relationship between TAM, SAM, and SOM like this:
iPod and the portable music player market
Any product or service generally fits in a category of similar products or services. For example, the iPod competed within the category of portable music players, pioneered by the venerable Sony Walkman two decades earlier. Primarily due to its ease of use, style, integration with iTunes, and the ability to purchase songs for $0.99, iPod quickly became a category leader with over 70% market share over the years. In this case, the TAM comprised all types of portable music players such as Discman, Walkman, and digital players. The SAM comprised digital MP3 players, which accounted for a very small percentage of the overall category in early last decade when iPod was introduced. The SOM for iPod ended up greater than 70% over the years, and has remained there.
Research your TAM and SAM
So how does one go about finding TAM and SAM for your market?
The first step is to conduct thorough market research. You can begin by searching for data published by market research firms such as Gartner, Forrester, Dataquest, or IDC. Their research reports are expensive, often costing thousands of dollars. However, articles about companies in your industry in publications like Inc, the Wall Street Journal, or the New York Times will often quote data from these sources. Investment bank research reports are another great source of market size data.
Firms like Goldman Sachs, Merrill Lynch, and Morgan Stanley have research departments that put out market forecasts on a regular basis. Sometimes, these market size numbers are mentioned in stock analyst reports. If you have an account with discount brokerage firms such as Fidelity or Schwab, you will have access to some stock analyst reports.
If your competitor is a public company, sometimes their SEC filings can be a goldmine of information. You can use sources such as Edgar or 10K Wizard to search public filing documents.
Established competitors’ websites are also a great source of market information. For example, if your company has anything to do with computer networking products or services, Cisco’s website is a great source of market trends and competitive information.
Public companies are required to share information about market forces that affect their business, with analysts and investors alike. Quarterly and annual reports are often available on the investor pages of a company’s website.
If you are creating a brand new category that never existed before, you will need to develop estimates based on the products or services you will replace. Office computers replaced typewriters during the ‘70s and ‘80s. There was no way to forecast how many terminals or PCs would be needed in a business, but replacing the existing number of typewriters would have been a reasonable place to start the analysis.
Bottom-up SOM forecast
Share of Market (SOM) data has to be backed by a bottom-up forecast, detailing how you will utilize resources to achieve your revenue goals. The number of sales professionals and channels employed, advertising spending, degree of newness, and the ability to disrupt a market with a dramatically better product or lower price point will factor into the SOM forecast. It is best to build three forecast scenarios: Optimistic, Most Likely, and Pessimistic.
Most likely, your forecasts will need to be revised within a few months of product launch. This is why a business plan is a living document that needs to be updated regularly. In general, forecasting SOM greater than 10% is going to require a great deal of justification. It’s far better to beat your forecast rather than having to explain why you fell short of the numbers you promised the investors.
Investors want to see if you understand the challenges of building a business from the bottom up, and they want to invest in people who have a clear picture of the market and competitive landscape. Having a firm grasp of TAM, SAM, and SOM will propel you in the right direction.
Related Services: Market & Competitor Research & Analysis.
|Author(s)||Shyam Jha (other articles by Shyam Jha)|
|Original Publication Date||October 21, 2013|
|Related categories||Market Research & Analysis|
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