Categories
Blog

Don’t Confuse Product Knowledge with Market Knowledge

I frequently hear an in-house expert on a company’s product or technology described as a “market expert,” or as having great “market knowledge.”

As an investor, this is a dangerous thing to hear or say!

It conflates internal technical knowledge – the knowledge of how a proprietary product or technology works – with market knowledge – the knowledge of customer needs, market problems, and overall trends, and implies that existing product knowledge is a good substitute for market knowledge. It’s not, and conflating these can lead to overconfidence, poor strategic decisions, and lower returns (or worse).

Any software company is likely to have experts in the technology the company sells – at how to implement it, how to use it to accomplish different things, etc. But that knowledge is MUCH different than the knowledge a market expert or leader has, especially when selling a non-technical product.

 

Categories
Business

Understanding TAM/SAM/SOM

Quick: you’ve been kidnapped by a company in the middle of a fundraising round. The CFO has a gun pointed at your head, and shouts “we’re a B2B enterprise software company! We need to include TAM/SAM/SOM analysis. What do we do?”

Here’s my answer:

First, understand that the TAM/SAM/SOM analysis does a few things:

  1. It gives potential investors a vision for your businesses’ potential.
  2. It gives discerning investors a sense of how rigorous you’ve been in your thinking about your business, your market segmentation, and competitive dynamics.
  3. Smart thinking here will provide guidelines for your team’s product and GTM strategy.

TAM – Your Total Addressable Market. This is the entire revenue opportunity that exists today for a type of product or service, assuming unencumbered access to it.

For example: I’m selling an amazing $8 espresso drink. My TAM is all coffee drinkers.

SAM – Serviceable Addressable Market. Your SAM is the revenue opportunity that exists given your specific product’s current capabilities and your company’s ambitions. What segment of the market are you addressing today?

In our example, not everyone who drinks coffee likes espresso. And not all espresso drinks want to pay $8. My SAM is everyone who would be willing to pay $8 for a cup of amazing espresso.

SOM – Serviceable Obtainable Market. Finally, your SOM is what you can reasonably expect to achieve given your current operational resources (or the operational resources you expect to get) and the competition.

If my coffee shop is based in San Francisco, I’m not going to be able to sell to customers in New York. And within San Francisco, there is a lot of competition for people willing to pay $8 for a shot of espresso. The SOM is who can you reach that will prioritize the features of your product over its competition?