Uncovering the Market Size: What TAM, SAM & SOM Mean to You

Summary

In this video, Brett explains the key entrepreneurial concepts of TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market), and how they differ. He breaks them down using the example of a food safety software company that detects pathogens and allergens in food manufacturing. TAM refers to the entire food safety market, SAM focuses on software users in food manufacturing, and SOM is the short-term target, such as allergen detection. Brett emphasizes the importance of these metrics for understanding a business's vision, market strategy, and scalability, offering valuable insights for entrepreneurs and investors alike.

Takeaways

• 😀 TAM (Total Addressable Market) refers to the total money spent on a product or service in an entire industry, representing the broadest possible market size.
• 😀 SAM (Serviceable Addressable Market) narrows down the market to a specific demographic, industry, or target market that the product can actually serve at present.
• 😀 SOM (Serviceable Obtainable Market) is the short-term goal for a company, focusing on a specific subset of the market that can be captured in the near term.
• 😀 Investors often ask for TAM, SAM, and SOM to understand an entrepreneur's vision and how they think about scaling their business.
• 😀 TAM is about understanding the ultimate potential size of the market and envisioning future growth, even beyond the current scope of the business.
• 😀 SAM is about assessing where the product or service fits in the current market, often defined by specific customer characteristics or needs.
• 😀 SOM is a short-term focus, indicating how a company plans to break into the market quickly, often targeting a niche or specific aspect of the market.
• 😀 The process of defining TAM, SAM, and SOM helps entrepreneurs clarify their go-to-market strategy and measure the scalability of their business.
• 😀 For investors, TAM and SAM show the business potential, while SOM helps gauge how well an entrepreneur understands their immediate target and market approach.
• 😀 Understanding and being able to communicate TAM, SAM, and SOM is crucial in any pitch, as it demonstrates both vision and a well-thought-out business strategy.

Q & A

What do TAM, SAM, and SOM stand for?

TAM stands for Total Addressable Market, SAM stands for Serviceable Addressable Market, and SOM stands for Serviceable Obtainable Market.

Why are TAM, SAM, and SOM important for entrepreneurs?

These metrics are crucial because they help entrepreneurs understand the market opportunity for their business at different stages—how large the market could be in the long run (TAM), what portion of the market they can target currently (SAM), and what they can realistically achieve in the short term (SOM).

What is the difference between TAM, SAM, and SOM?

TAM represents the entire market potential, SAM is a subset that you can target with your product based on your capabilities, and SOM is a further subset that focuses on what you can realistically achieve in the short term.

How does TAM help an entrepreneur?

TAM gives an entrepreneur a vision of the largest possible market for their product or service, helping them think big about the potential scale of their business.

What does SAM help entrepreneurs understand?

SAM helps entrepreneurs focus on the market that they can actually serve right now, based on factors such as target demographic and available resources.

Why is SOM considered a short-term goal?

SOM is considered a short-term goal because it focuses on a specific, achievable target in the near future, such as a particular product offering or a limited segment of the market.

In the food safety software example, what is the TAM?

In the food safety software example, the TAM is the total amount of money being spent on food safety across the entire food value chain, including all aspects of food manufacturing.

How is SAM defined in the food safety software example?

SAM in the food safety software example is the segment of the market that is relevant to food manufacturing facilities that currently use or could potentially use software for food safety.

What is SOM in the food safety software example?

SOM in the food safety software example is the short-term market focus, where the company aims to target enterprises in food manufacturing that specifically want to detect allergens.

What is the main purpose of understanding TAM, SAM, and SOM for an investor?

For an investor, understanding TAM, SAM, and SOM helps assess how an entrepreneur thinks about their business and market potential. It reveals the entrepreneur's big vision (TAM), realistic targeting (SAM), and focus (SOM), which are important for evaluating their growth strategy and business viability.