When I work with investors and companies on market analysis, one the things everyone wants to know is “what is the total addressable market (TAM)?” This is an important question, but is just the tip of the iceberg, especially because many entrepreneurs (and investors!) focus on identifying the biggest number possible.
When a company stays focused on the giant number, it doesn’t give any real strategic guidance – “we’re playing in a $3billion market” doesn’t help much sense when you’re selling $10m worth of software. Instead, it’s important to dive a little deeper and be more rigorous in your analysis.
I usually break this out into a “TAM/SAM/SOM” analysis.
This does a few things:
- It gives potential investors a vision for your businesses’ potential.
- It gives discerning investors a sense of how rigorous you’ve been in your thinking about your business, your market segmentation, and competitive dynamics.
- 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.
It’s nice to have a giant number here – set the vision for your investors and employees. Give yourself something to grow into.
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. And I’m based in San Francisco and don’t plan to expand. My SAM is everyone who would be willing to pay $8 for a cup of amazing espresso in San Francisco.
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.
In our example, I’m competing against the chain stores like Starbucks, Petes, and the little boutiquey coffee places that are all over SF. I’m not going to win all that business, but with proper marketing and sales execution and great operations, I can win 20% of the time (this is where my silly coffee shop example falls apart, but hopefully the point is clear).
Using TAM/SAM/SOM to drive strategic decisions.
The TAM/SAM/SOM analysis doesn’t just exist to look good on an investor pitch deck – done right it should drive strategic decisions about your operations. Pull different levers and you can increase or decrease different numbers:
- Increase your TAM by adding features or functionality that fundamentally broadens your scope or increases your price. Add pastries to your coffee shop. These are typically cross-sell opportunities, add-on opportunities, or simple price increases.
- Increase your SAM by appealing to different segments within your main market. Often this is geography – expanding internationally, for example. But it can also be product-based – by adding a feature or two you can appeal to a new vertical within the same basic market – or sales/marketing-based – depending on the market, you may need to establish key partnerships to effectively service a market.
- Finally, you can increase your SOM through a variety of execution methods, including organic methods (better marketing and sales execution, better positioning, gaining a market leadership position) or inorganic methods (e.g., acquisitions of key competitors).
A simpler way of thinking about this is:
- Increase TAM: Can we sell more?
- Increase SAM: Can we sell to more people/accounts?
- Increase SOM: Can we win a greater percentage?
Putting it into action.
I like to present the full TAM/SAM/SOM analysis to the Board along with options for expansion that we’ve brainstormed beforehand with the executive team. This gives you an opportunity to enroll your board in the journey with you, solicit new ideas in a structured fashion, and gain useful feedback and guidance.