TAM, SAM and SOM are useful indices for start-ups and investors to measure the size and potential of a target market.
Knowing these indices is useful for companies wishing to introduce a new product or service to assess the business opportunity. Market sizing also helps investors understand the value of the potential opportunity within the target company's business plan. TAM, SAM and SOM, in fact, make it possible to examine different parts of a market and obtain quantitative estimates of the possibility of successfully entering it.
Preliminary analysis of market sizing through these indices is fundamental for defining the very first sales and marketing strategies for a product or service, but also for having an estimate of the profits that the business will be able to generate and its maximum growth.
What TAM SAM and SOM represent and how they are calculated
The term denotes three acronyms, which identify three different parameters used to estimate the size of the market, the potential of one's product or service in that market, and finally the profit that the start-up can generate, i.e. the number of potential customers.
· TAM (Total Addressable Market): the total available market
· SAM (Served Available Market): the potentially available market
· SOM (Serviceable Obtainable Market): the actually obtainable market
SOM and SAM help to understand the starting level and reduce investment risks while TAM helps to understand the growth potential, i.e. the maximum situation to which a start-up can aspire in a development path.
The SOM is the most important index to know at the beginning, that part of the market that you can reach right away: the Serviceable and Obtainable Market.
In order for a start-up to present itself optimally in this respect, it must demonstrate people's willingness to buy the product; show a marketing plan with precise and determined channels; and report a reasonable number of people reachable immediately at launch.
If the Serviceable and Obtainable Market (SAM) makes a project credible in the eyes of investors, the Served Available Market (SAM) can be used to verify performance and show the growth potential of the business launched on the market.
After funding has been provided to a start-up and the ability to gain market share has been demonstrated, an investor might consider expanding and increasing penetration in the Total Addressable Market. In this context, the functioning of the TAM is precisely to present what is the maximum conceivable growth for the start-up in a given time frame.
Why it is essential to know the TAM SAM and SOM of your market
Start-ups are high-risk, high-failure businesses that operate in volatile and extremely uncertain scenarios. This is precisely why the estimates that can be made are crucial in outlining a possible path for one's business. In fact, people often make the mistake of getting carried away by enthusiasm and overestimating the market potential of their product or service, but there are also many who, gripped by pessimism, decide to abandon potentially successful projects out of an excess of prudence.
These indices are one of the most concrete tools available to investors when evaluating an investment opportunity. At this stage, the calculation of the SOM is particularly important, as investors are interested in a start-up's ability to reach the SOM in a reasonably quick timeframe.
The estimation of the SOM presupposes a good estimate of the SAM, which makes it possible to define the probability of reaching the expected SOM, and thus also to outline a realistic index of growth potential. Should the SOM be reached on time, one will have proven one's credibility, and one may consider expanding to the SAM, generating an ROI for investors, who may then decide to invest further to expand within the TAM.
Conclusion
TAM, SAM and SOM give the numerical measure of the start-up's target market. It is often the case that a start-up does not have the necessary funds to support its launch properly. Fortunately, there are potential investors who are ready to put up the money needed to launch a start-up that has the numbers to beat the competition. By presenting the business model using among other data the TAM, SAM and SOM, investors will have a clear idea of the number of potential customers and the growth that can be expected. The presentation of these ratios must be absolutely realistic and trained advisors will be decisive in this. Presenting a clear business plan with reliable and realistic numbers provides access to solid financing opportunities.