Understanding TAM SAM SOM

Summary

In this informative video, Maggie Sailing from Startup Envy explains the importance of understanding TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market) for startups. These metrics are crucial for founders and investors to gauge market potential and set realistic revenue goals. Maggie outlines methods to calculate these figures, including top-down and bottom-up approaches, and emphasizes the value of market research. She also highlights the role of university business librarians in assisting with such research, providing a valuable resource for startups in Nevada.

Takeaways

• 📊 TAM (Total Addressable Market) represents the entire potential market size for a product or service, including all the money that could be made in a particular industry worldwide.
• 🌍 SAM (Service Addressable Market) is a subset of TAM, focusing on a specific geographic area or sector that a startup aims to serve, usually 1-10% of TAM.
• 🎯 PSALM (Product Service Addressable Market) is the portion of SAM that a startup realistically aims to capture, based on its offerings and market strategy.
• 🚀 Having a clear understanding of TAM, SAM, and PSALM is crucial for startups to set realistic goals and to communicate their market potential to investors.
• 📈 Investors are interested in these market metrics as they provide a roadmap for a company's growth and potential return on investment.
• 🔍 Calculating TAM and SAM involves both top-down (using published data from sources like the UN or World Bank) and bottom-up (starting with local market research) approaches.
• 💡 Market research can be conducted in-house or through external research firms, but for startups, leveraging free information and local university resources can be cost-effective.
• 🏢 Examples like Uber and Airbnb demonstrate how startups can define their TAM and SAM, and project their revenue potential based on market research and customer validation.
• 📚 Public university systems, such as those in Nevada, offer free business and IP research services to the public, which can be invaluable for startups conducting market analysis.
• 💼 The script emphasizes the importance of market research in helping startups understand their potential market size, customer demographics, and revenue projections.

Q & A

What is the role of Maggie Sailing in Startup Envy?

Maggie Sailing is the Communications Director and Chief of Staff at Startup Envy.

Why are TAM, SAM, and SOM important for a startup's pitch deck?

TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market) are crucial as they provide investors and founders with a clear understanding of the market potential, the specific segment the startup aims to serve, and a realistic target for revenue generation within a given timeframe.

What does TAM represent in the context of a startup?

TAM represents the Total Addressable Market, which is the entire potential market size for a product or service, considering the entire industry and all the money it generates worldwide.

How is SAM different from TAM?

SAM, or Serviceable Addressable Market, is a subset of TAM. It focuses on a specific geographical location or a particular sector that the startup is targeting, and is usually a smaller number, often one to ten percent of TAM.

What is the significance of SOM in a startup's business model?

SOM, or Serviceable Obtainable Market, is a projection of the revenue a startup aims to achieve within a specific timeframe, such as one to three years. It represents a realistic target based on market research and potential customer penetration.

Why is it unrealistic for a startup to aim for 100% of the SAM?

Aiming for 100% of the SAM is unrealistic because it's improbable for a startup to capture the entire market segment they are targeting, especially within a short period. Market competition, resource limitations, and market dynamics make such a goal unattainable for most startups.

What methods can be used to calculate TAM, SAM, and SOM?

Calculations can be done using top-down or bottom-up approaches. Top-down involves using published market data from sources like the UN or OECD, applying geographic and demographic filters. Bottom-up starts with local market research and customer validation, then extrapolates to estimate potential revenue.

What is an example of how Uber calculated its TAM and SAM in its early days?

Uber calculated its TAM as the global transportation industry, which was worth 5.7 trillion, but narrowed down its SAM to the taxi and limousine market in the United States, valued at 4.2 billion in 2007.

How did Airbnb approach TAM and SAM during its early stages?

Airbnb started with the total number of worldwide overnight trips as its TAM. It then focused on online-booking trips as its SAM, and from there, it aimed to capture a portion of this market by offering unique accommodation options.

What resources are available in Nevada for startups needing market research assistance?

Business librarians at the University of Nevada, Reno (UNR) and the University of Nevada, Las Vegas (UNLV) offer free market research assistance to the public, including demographic research and IP research.

How can a startup use a stacked Venn diagram to illustrate TAM, SAM, and SOM?

A stacked Venn diagram can visually represent the relationship between TAM, SAM, and SOM, showing how each market segment is a subset of the previous one, and providing a clear picture of the market potential and the startup's target.