TAM SAM AND SOM ARE NOT GOOD ENOUGH — STOP RELYING ON THEM
This post is to everybody in the startup ecosystem, both founders and investors.
Everybody in the startup ecosystem has probably heard of the terms TAM, SAM, and SOM. They appear on every pitch deck, they drive a lot of early filtering from VCs, and they have become universal go-to metrics to throw around.
But guess what, these metrics are not good enough and, frankly, should be put on the shelf.
First, some definition:
- 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.
Let’s say you are making a cyber solution for anti-lock brake systems in modern cars.
The TAM is the whole global car industry, or in the US
The SAM is just the subset of that industry dealing with anti-lock brakes in the US (or what we like to call the “relevant market”).
The SOM is what part of the ABS market niche in the US you can capture over time.
Here is another example.
My argument is that TAM, SAM, and SOM are simply not good enough for founders to really understand where they are going with their product. For investors, TAM, SAM, and SOM are poor indicators of whether or not the founders are able to successfully enter the market.
Why?
At the bare minimum, founders must be able to define not just the size of their relevant marketplace, but how they fit in to it. In addition, founders need to define (and investors need to see), where the market is going in the future.
TAM, SAM, and SOM are just the initial building blocks to contextualize the relevant market, and the rate of growth in that niche. In effect, they are the bare minimum “must haves” that founders need, both for their own understanding, and for investing entities.
Founder — Must Have: Defining the Marketplace. TAM, SAM, and SOM.
But what founders need to understand for themselves, and for investors to look for, is deeper, specifically where is this niche market going.
Founder — Should Have: Where the relevant market is going in the future — recent trends that are grounded in reality that indicate future demand within the niche, and how product will be part of those trends.
Together, these things help founders and investors understand deeper market dynamics like who pays for what, when and why.
It is best to illustrate this with a real example for a real client, dealing with machine learning in the continuing medical education field (CME).
In addition to the TAM, SAM, and SOM, here is a so-so market analysis:
In addition to TAM, SAM, and SOM, I can see that the niche market has a lot of competition, and that it is growing, and that there is a regulatory aspect that founders must be able to address and overcome.
But that is not good enough. Here is a good market analysis for the same company:
In addition to what I had before, I know more about the actual users, and that the CME is divided into subsectors. More importantly, the subsector most relevant to the company (online and multi-platform) is quickly trending upwards.
But even this can be improved on. Here is a great market analysis for the same company:
In addition to all I had before, now I understand exactly where the market is going, who pays for what, and why. I now know that cross-platform content for nurses that has premium content based on preventive medicine is the sweet spot.
For founders: This is where they should be heading. This is what they should be targeting. This is the go-to market strategy in a nutshell.
For investors: This is a clear indication that founders are successfully positioning themselves to make an initial penetration into the market.
None of this can be gleaned from TAM, SAM, and SOM alone. Founders should demand more from themselves when they do market analysis — to the point where you are able to clearly see the value proposition and go-to market strategy. Investors should demand more as well, so they have a stronger picture of what the initial first steps into the “real world” will be for their potential investment targets.
