Understanding TAM SAM SOM
Summary
TLDRIn 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.
Outlines
📈 Understanding TAM, SAM, and SOM in Startup Valuation
This paragraph introduces the concept of TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market) as crucial components of a pitch deck for startups. It explains that TAM represents the total potential market size, SAM is a subset of TAM that a startup can realistically service based on factors like geography or sector, and SOM is the portion of SAM that a startup aims to capture. The paragraph emphasizes the importance of these metrics for founders and investors alike, as they provide a roadmap for a company's growth potential. It also touches on the unrealistic expectations of capturing 100% of the market and suggests using external data sources like the UN or OECD for accurate market sizing.
🚀 Calculating TAM, SAM, and SOM: Methods and Examples
Paragraph 2 delves into the methods of calculating TAM, SAM, and SOM. It discusses the top-down approach, where one starts with broad market data and applies filters to arrive at SAM and SOM, and the bottom-up approach, which begins with local market research and customer validation to extrapolate to larger markets. The paragraph uses Uber and Airbnb as case studies to illustrate how these metrics were used in their pitch decks to project revenue and market potential. Uber's initial focus on the taxi and limousine market and Airbnb's innovative approach to overnight stays are highlighted, showing how they used TAM, SAM, and SOM to attract investment and guide their business strategies.
🎯 Tailoring Market Research for Startups: A Practical Example
Paragraph 3 presents a practical example of a startup that aimed to rent professional sports jerseys. It outlines the startup's bottom-up market research approach, starting with the total audience for major sports (TAM), narrowing down to the local audience in New York City (SAM), and then identifying a segment interested in their service (SOM). The paragraph details how the startup conducted surveys at sports events to gather demographic information and customer interest, leading to the development of two service offerings: one-time rentals and season-long rentals. It concludes with a stacked Venn diagram to visually represent the market segments and a projection of potential revenue based on the survey results.
🏛️ Leveraging University Resources for Market Research
The final paragraph emphasizes the availability of free market research resources through public universities, specifically mentioning the role of business librarians in Nevada. It suggests that these professionals can assist with market and IP research, providing valuable data to startups at no cost. The paragraph encourages startups to utilize these resources, which can include demographic research to refine market size estimates. It also hints at the possibility of incurring costs for very specific information or printed reports, but overall, the paragraph promotes the use of university resources as a cost-effective way to bolster a startup's market research efforts.
Mindmap
Keywords
💡Total Addressable Market (TAM)
💡Serviced Addressable Market (SAM)
💡Serviceable Obtainable Market (SOM)
💡Market Penetration
💡Market Research
💡Top-Down Approach
💡Bottom-Up Approach
💡External Research
💡Investor Perspective
💡Marketplace
💡Customer Validation
Highlights
Understanding TAM, SAM, and SOM is crucial for founders and investors as it provides a roadmap for where the company is heading.
TAM (Total Addressable Market) represents the entire industry and the total revenue it generates worldwide.
SAM (Serviceable Addressable Market) is a subset of TAM, focusing on either a specific geographical location or a particular sector within the industry.
SOM (Serviceable Obtainable Market) is the realistic market share a company aims to capture, often in the range of 1-10% of SAM.
A realistic SOM target is essential. Assuming a 100% market capture is generally unrealistic.
Using a visual representation, such as stacked circles, to depict TAM, SAM, and SOM makes the concept easier to understand for investors.
TAM gives investors an idea of the total market potential if everything goes perfectly.
Calculating TAM, SAM, and SOM involves both top-down and bottom-up approaches, with a combination of research and market validation.
Top-down calculations rely on available global data sources, like the UN, OECD, and the World Bank, to provide insights into the market.
Bottom-up calculations start with the local market, involving direct customer validation and research to scale up.
External research firms can be used for market research, but they can be costly and may become outdated quickly.
Examples like Uber and Airbnb show different ways to approach TAM, SAM, and SOM calculations and how they projected their growth.
Uber initially underestimated its potential market, demonstrating how TAM, SAM, and SOM are evolving and can exceed initial projections.
For startups, engaging with local resources like university business librarians can provide free assistance with market and demographic research.
Providing a clear and realistic TAM, SAM, and SOM helps investors understand the market size, growth potential, and expected return on investment.
Transcripts
i'm maggie sailing i'm with startup envy
i'm the communications director
and the chief of staff and happy to be
bringing
this information to you it's a very
important part of your pitch deck
it's something that investors are going
to be very interested in but it's
something that a founder should be
interested in too
knowing your numbers your tam sam and
sam can give you a road map for where
your company's going
so what are they what is tam sam and som
tam is the total addressable market and
that is the world view
this is your industry and all of the
money that it generates
worldwide sam is the serviced
addressable market
and you can go one of two ways with this
you can
have a geographical location which i
think is a good way for a startup to go
or you can do the subset of the tam
that is the particular sector
that you are in sam is a smaller number
than tam it's usually one to ten percent
of the tam
and then for your psalm this is your
target for how much you think you can
make
out of the sam and that is also going to
be a smaller percentage
having an unrealistic percentage
thinking that you're going to get a 100
percent
of the service available market is not
realistic
how do we get to these numbers take a
look on the left side you can see i have
tam sam and some and these sort of
stacked
circles this is the easiest way to
depict
your tam salmon sum it's very easy for
investors to understand it
and because one is a subset of the other
makes a lot of sense getting down to the
small percentage that you're going to
try to penetrate
why do we need these numbers well
because an investor wants to understand
your marketplace
the tam gives the upside this is the
potential if everything were to go right
oftentimes people say that if you're a
utility
then your tam your total addressable
market is a hundred percent
because you're the only game in town
this is not realistic
for most startups the tam also
divides marketplaces into different
sectors
so there's the transportation sector
there's the energy sector
these are very broad categories so in
doing tam you could do
the whole sector representation or you
could
do if it's a big number you could still
do
your particular piece of that pie then
when we get to
the sam it gives context to what your
potential
is in the next 10 years it can be
a geographical area it could be your
whole state it could be your country
if there's huge potential it could be
smaller than a country
it could just be your local area your
whole state
the psalm is a realistic view of what
you want to do it's what you can obtain
in say one to three years so how much
penetration are you going to get into
the psalm
in a three-year period the way i said
that it can help you with your goals
is you know you're not going to get
there in the first year in all
likelihood
but if you have it as a goal in three
years then an investor that's looking at
your business
understands what your trajectory is
going to be and then what the whole
potential can be
by looking at the tan well how do we
calculate these things
and it's not easy when you do it top
down
is there's a tendency for people to want
to just pick a
percentage as what you can attain
with no actual basis for that happening
but there is free information out there
from the un
the oecd the world bank you can get
numbers on total sector marketplace
numbers
that are published worldwide from there
you would apply filters like geographic
filters
and demographic filters to those numbers
to get to your sam and psalm it's
hard to actually apply those numbers
that takes a certain amount of research
in itself
but you can get two numbers that will
suffice as tam salmon saw another method
for
creating tam samson is bottom up a lot
of investors prefer
a bottom-up design but it's very easy to
underestimate
what your marketplace is going to be
doing it that way
here you start with your first market
let's say that it's reno and las vegas
and you're going to open up a fast food
market
depending on what you're serving you
could have sam
as all of the fast food in reno and las
vegas
and it's very easy to find fast food for
the us
which would be your tam or fast food for
the entire world
which is not realistic it would take a
long time to get to where you were
penetrating in other markets
so if you did tam as fast food for
the united states and sam as fast food
for las vegas and reno you would be well
on your way
and then you could do your some based on
whether you're doing
burgers or chicken or some other fast
casual type of
approach and with demographic research
and with talking to people bottom up you
start with your local
and you do customer validation you go
out and talk to people
and then you extrapolate up the last way
to do it is through external research
you can pay research firms to actually
go out and do this market research
it costs a lot of money and
it becomes stale after a certain period
of time
so large companies will use these
research firms
to do that sort of research if they're
going to go into new
fields or bring out a new product it's
not really
for the startup community let's take an
example
okay so this is uber and
uber i have actual numbers from their
2007 pitch deck
so right now the transportation industry
is 5.7 trillion worldwide
but transportation is a broad category
and it includes
sea rail train
and air freight and these were not
things that
uber was going after so for their psalm
they selected the taxi and limousine
market in the united states
which was 4.2 billion in 2007
and then for some their pitch deck kind
of
was wishy-washy i wouldn't recommend
doing it this way because
the best case is the one that you really
want to talk about
you do want to be realistic so they said
their best case they would be the market
leader
and they would get 1 billion in yearly
revenue
their worst case though that was that
they were just a private car service in
san francisco where they were starting
so their first two cities that they
intended to go after were new york and
san francisco well we all know what
happened with them
so uber's revenue in 2019 was 14.15
billion
and they expanded they weren't just ride
hailing
they expanded to ubereats to
uber freight to uberx and ubermobility
so
they really sort of undershot what they
could do
but it's a great story so
another example we have is airbnb now
airbnb is still private
but airbnb was creating a new
marketplace
they were creating new availability for
overnight stays
by engaging with regular people
and so in order to try to paint a
picture of what that marketplace would
look like
they started with what was currently
happening in overnight stays
so the 1.9 billion trips were booked
worldwide
that was their tam budget and online
trips because they figured that theirs
would be less expensive
were 532 million trips that was their
sam
and they figured that they could get
10.6 million
out of that so taking it one step
further then
they took the number of trips that was
their target
times their average fee which was twenty
dollars on a three night stay at a
seventy dollar night place
and it worked out to revenue estimates
of 200 million
between 2008 and 2011. so they were
projecting forward
to get to 200 million and now
airbnb their revenue for 2017
was estimated at 2.6 billion
so here they paint a very easy to
understand picture
of what their marketplace could be
marketplaces are a little bit hard to
depict
so here is another version from our
friends from boom startup
here they take the three different areas
that they want to create a marketplace
around
and they're going to take a percentage
of the action
so they're trying to get to how much
business
is possible and then they'll get a
percentage of it
so if you look at custom clothing design
they estimated their sam down to be 32
billion
in the u.s and
the for custom clothing manufacturing is
27.4 billion
and for custom clothing e-tailing
24 billion so then you would take this
and massage
it against what your percentage of the
transaction is going to be or if you
have a flat fee whatever that number it
is
and then you can predict what your
income is going to be in three years or
five years
depending on what percentage of that you
think you can make
now here we have another example from a
startup
that was really just doing customer
validation and trying to figure out
what their market could be so they went
the bottom up approach
they went out and did research so the
premise for
their company is that they were going to
rent professional sports jerseys
in five of the major sports fields
so they were going to start with new
york city so their tam
was how many people watched the five
major sports
on tv in the us and that's 150 million
americans
then their target is for new york city
so they figured out how many
new yorkers are watching the five major
sports and that was 11 million people
and then they had a premise before they
went out to yankee stadium to do their
research and the premise was that
season ticket holders were going to be
male and they were going to be
under 30 years old and they would be the
core
of their customer and they would
probably want to rent
a season-long jersey and they made it
enticing because say your player got
traded away
you could trade in your jersey and they
would you know make sure that
it got cleaned and your new one was
cleaned before it went back out
so they made it very flexible because
you know new yorkers very rabid about
their sports
uh then they went to a game and they
talked to people
and they discovered that women would
also be part of their demographic
and that a lot of them were interested
in just renting one jersey for an event
say they didn't have season tickets but
when they went to a game they wanted to
really embrace the whole spirit of the
game
and so they wanted to have a player
jersey when they went there
so they developed a second branch of
their
company that was one-time rentals so
naturally the one-time rental fee is
higher
and the season-long fee with the
exchange possibilities a little bit more
so when they did their survey at the
game they found out that 11.7 percent of
the people said that they were very
strongly interested in partaking in
their service
so here is what they presented and now
we're going to take a look at how
a stacked venn diagram makes it a little
bit easier
to understand so on the left you have
the diagram
and on the right you have the
explanation so there's 150 million
americans that are watching the five
major sports
that's the tam the sam was 11 million of
them watching in new york city
and then the psalm is based on the 11.7
percent that showed a strong interest
which works out to 1.3 million people
but this isn't telling us anything about
the revenue so how do they figure that
we take another slide and we'll do it
sort of like airbnb
did so if we figured that our
percentages for the two different lines
the rentals
one time versus the rentals for the
season it's going to be a 60 40 split
we know what our fees are we can
actually you know figure out what the
fee should be in order to make the
number that we want but
but these seem like reasonable fees when
we did the survey with the people
in the stadium so one-time fee of fifty
dollars
and a season-long fee of 250. massage it
against
the percentages and you come up with
169 million dollars in three years
so that was their target this is
something that's really
easy for an investor to understand that
will be at 169 million
in three years so based on what their
investment is
they can tell how much they're going to
make back it's what
investors want to know how much am i
going to make back and when am i going
to get it
so all of this research can be very
daunting
and you have resources though in the
state of nevada because the university
system
is public and is funded by our taxes
they have a certain duty to help the
public when the public wants help
so they make their business librarians
available
to the public so i have here the names
of the two people that can help the
general public
with market research and also with ip
research
so if you have an idea for something you
think you can patent it
then you can go to the engineering
librarian at
unr or patrick griffis can also do the
patent work down there at unlv
and they can help you look up whether a
patent exists
for something that you're considering on
the other hand
any of these people can help you with
market research
the two different universities subscribe
to different databases so i actually
recommend
that you contact all of them and ask
them how they can help you
the research can extend into
doing demographic research so if you
think
that you want to know how many people in
nevada
are between the ages of 30 and
50 that make at least 60 000
a year they can do research like that as
well and that can help you arrive
at how big your market is so i would say
go ahead and contact these people
they're there to help you
and they'll do it for free and
you may have to pay if you want some
stuff printed
if you want reports emailed to you
that's usually free
and if you want very specific
information like the email
addresses of all those people that were
between 30 and 50 making
at least sixty thousand dollars a year
you may have to pay for that kind of
information
so that's it for tam sam and sam and
we'll see you next time
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