TAM SAM SOM
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What is TAM SAM SOM?
TAM, SAM, and SOM are acronyms; they describe different types of markets:
TAM or Total Available Market is the total market demand for a product or service.
SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.
An evaluation of business market size is very important to understand how far a business can go through. TAM SAM SOM is the perfect market-size metric when it comes to measuring the viability of the business.
1. Total Addressable Market (TAM)
How big is the largest market?
The TAM is the total market you could serve with your product or service.
It represents the maximum revenue you could make in the long run if you captured 100% of the market.
2. Serviceable Available Market (SAM)
How big is the market you could reach now
The SAM is a step lower than the TAM, because you are still limited by, for example, the location of your company or the specialization of your company.
SAM is the market that you could actually reach, this will become the market you are going to focus yourself on in the medium term.
3. Serviceable Obtainable Market (SOM)
What is the market you can reach with your current resources?
The SOM can be used to attract the largest possible market in the short term with your current resources.
By resources, think of:
Staff
Money
Brand awareness
Location
Competition
So basically everything you have now, what’s available or what you have to deal with.
4. Earlyvangelists
What are your most potential customers?
Officially, this part doesn’t belong in there, but we’ll just call it the TAM SAM SOM+ Model…
The early evangelists are your most potential customers who can help you get a Problem-Solution Fit and ultimately help you validate whether there is a Product-Market Fit.
You can recognize early evangelists by:
They got a problem
They understand that they got a problem
They are actively searching for a solution
The problem is painful enough that they created a homegrown solution.
There is money or a budget to solve the problem.
TAM SAM SOM Example
For a fast-food restaurant, the Total Addressable Market (TAM) would be the global fast food restaurant market. You can only achieve this if you were located in every country in the world and had absolutely no competition.
It would be more realistic to estimate starting two restaurants in two different cities based on the population and eating habits. So the Serviceable Available Market (SAM) represents the demand for your type of product within your reach. In other words, if you were the only fast food restaurant in town then you have your SAM.
Of course, it’s also still important to consider your competition. You can’t have the entire SAM as a market in this case, because you have competitors as well. With the Serviceable Obtainable Market (SOM), you take into account that you are only going to have people within a certain area of the city as customers.
In this case, the early evangelists could be foodies who are always looking for the latest dining options or perhaps people within a 200-meter radius. The early evangelists are your very first customers, who you are going to receive the most important feedback.
WeWork's Case: TAM, SAM, and SOM?
Calculations for the size of the workspace market for desk-based service sector workers within OECD nations and the current WeWork markets suggest a TAM of $1.35 trillion.
Narrowing the TAM down to workers within the "Creative Class"—those with tertiary education, urban living, and working in enterprises with less than 250 people—gives a SAM of $168 billion.
Projecting out WeWork's revenue for five years' time gives an estimation of $33.8 billion, which corresponds to 20.9% of its SAM. This corroborates with a total estimated 25% market share held by all coworking businesses, of which WeWork is a leading player.
Relative to its TAM, WeWork's SAM and SOM are 12.4% and 2.6% respectively. The large gap between the TAM, but the small gap between SAM and SOM demonstrate that the business is a niche player, but highly effective and desirable within its niche.
Why use TAM SAM SOM?
The TAM SAM SOM Model has two major advantages:
You focus on evolving your product or service
It gives investors a good insight into the potential Return on Investment (ROI)
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:
Your product: people will want to buy your goods
Your marketing plan and the identified distribution channels: you have a clear plan to reach a large portion of your target customers
Your SAM and the strength of your competition: chances are that you are not going to take 50% market share within 6 months. Therefore your SOM needs to be a reasonable fraction of your Serviceable Available Market.
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.
ROI calculation
Based on the TAM SAM SOM example, you could say that:
TAM = $2 billion
SAM = $100 million
SOM = $5 million in 2 years and $12 million in 4 years
Earlyvangelists = the first $250,000 of sales
Assume you get a $250,000 investment versus 20% equity. Then at $5 million revenue, you would have an EBITDA of $5 million x 25% margin = $1.25 million. At that point your company would be worth 8 x $1.25 million EBITDA = $10 million. The ROI for an investor at that point is ($10 million x 20% ownership) / $250,000 investment = 8.0x
If you reach the target of $12 million the EBITDA is $12 million x 25% margin = $3 million, this makes the company worth 8 x $3 million = $24 million. The investor’s ROI is then ($24 million x 20% ownership) / $250,000 investment = 19.2x
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