Why is Market Analysis important to investors? (TAM/SAM/SOM)
When doing market analysis, startups often refer to TAM, SAM, and SOM. What do these acronyms mean and why are they useful to investors when assessing an investment opportunity?
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.
As can be seen from the definitions, SAM is a part of TAM. And SOM, in its turn, is a part of SAM.
Total Available Market (TAM)
Total Available Market (TAM), also known as Total Addressable Market or Market Potential, is the total sales volume of a particular product or service that can be sold by all vendors on the market worldwide (or a particular region, or a certain country) for the planned period (usually a year, a quarter or a month).
For example, if a startup is launching a subscription TV service, their research findings would reveal the Australian subscription video business is worth $2 billion per year.
Serviceable Available Market (SAM)
The next step would be to dig deeper and look at the Serviceable Available Market (SAM). This segment would be the total sales volume of a particular product or service that can be sold by all vendors on the market within a territory that you are able to serve for the planned period.
Recent research finds that Aussies total 13,050 users in Netflix, Stan, Foxtel, Youtube Premium, Fetch, and Amazon Prime. The startup launching their subscription TV service would be looking at this number of users as their SAM.
Serviceable Obtainable Market (SOM)
Lastly, Serviceable Obtainable Market (SOM) is the total sales volume of a particular product or service that can be sold by your company within a territory that you are able to serve for the planned period.
In this case, sales volume that ‘can be sold’ is based upon realistic sales forecasts that take into account your production, logistics, sales and marketing capabilities, your competitors’ actions and influences, expected market trends, and seasonality.
If the startup’s subscription TV service is only launching in Australia to fierce competition, they may estimate their SOM at 10% of the SAM, or 1,305 users over a fixed time period.
How would these figures fare when presented to the world of investors?
It is important to note that a small SAM is not a deal-breaker for investors as startup founders may specifically target a small and manageable SOM that can be easily grown into adjacent markets.
For the subscription TV service, their growth may be in the form of rapid expansion to another country or the addition of new TV shows within Australia.
While TAM/SAM/SOM evaluations may provide insight into the market, investors may view them as subjective impressions.
So unless your Startup is entering a Blue Ocean Market that has not been established before, it is important for these evaluations to be substantiated by having actual customers (and repeat customers) as soon as possible.
