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.

Outlines

00:00

📈 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.

05:01

🚀 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.

10:02

🎯 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.

15:03

🏛️ 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.

Keywords

💡Total Addressable Market (TAM)

TAM refers to the total potential market size for a product or service, which includes all potential customers within the industry worldwide. In the video, TAM is depicted as the broadest market view, illustrating the total revenue generated by an industry globally. It sets the upper limit for a company's growth potential and is crucial for investors to understand the scale of opportunity. For example, the script mentions the transportation industry as a broad TAM category.

💡Serviced Addressable Market (SAM)

SAM is a subset of TAM, focusing on a specific geographical location or a particular sector within the industry that a startup aims to serve. It represents a more realistic and attainable market size for a company, considering its resources and strategy. The video emphasizes that SAM is usually a smaller number than TAM, often ranging from 1 to 10 percent of TAM. It gives context to a startup's potential in a defined area, such as a state or country.

💡Serviceable Obtainable Market (SOM)

SOM is the portion of SAM that a company realistically aims to capture within a specific timeframe, typically one to three years. It is a more focused and achievable target compared to TAM and SAM. The video explains that setting a realistic SOM is crucial for startups to demonstrate their growth potential to investors. It is about understanding how much of the market a company can realistically penetrate and monetize.

💡Market Penetration

Market penetration refers to the extent to which a company's product or service has entered and gained acceptance in the market. In the context of the video, market penetration is about the percentage of the SAM that a startup expects to capture. It is an important metric for investors to gauge the startup's potential for growth and revenue generation. The video uses the example of Uber and Airbnb to illustrate how they projected their market penetration.

💡Market Research

Market research is the process of gathering, analyzing, and interpreting information about a market, including its size, consumer behavior, and competitive landscape. The video underscores the importance of market research in determining TAM, SAM, and SOM. It is essential for startups to conduct market research to understand their potential customers and the competitive environment they operate in.

💡Top-Down Approach

The top-down approach is a method of market estimation where one starts with the broadest market data (TAM) and narrows down to more specific market segments (SAM and SOM). The video mentions that this approach can lead to overestimating one's potential market share due to the tendency to pick percentages without a solid basis. It is contrasted with the bottom-up approach, which is preferred by many investors.

💡Bottom-Up Approach

The bottom-up approach starts with local or initial market data and extrapolates to estimate the total market size. It is often more accurate and conservative compared to the top-down approach. The video suggests that this method involves starting with the first market and then expanding the estimates based on customer validation and demographic research.

💡External Research

External research refers to the practice of hiring professional research firms to conduct market research. This can be costly and the data may become outdated quickly. The video points out that while large companies may use external research for entering new fields or launching new products, it is not typically suitable for startups due to budget constraints.

💡Investor Perspective

The investor perspective is crucial when discussing TAM, SAM, and SOM, as investors are interested in understanding the potential return on their investment. The video emphasizes that investors want to see a clear trajectory of a startup's growth and the potential market size to assess the viability and profitability of the business.

💡Marketplace

A marketplace is a platform or environment where buyers and sellers come together to exchange goods or services. In the video, the term is used to describe the broader industry or sector in which a startup operates. Understanding the marketplace is essential for defining TAM, SAM, and SOM, and for strategic planning and growth.

💡Customer Validation

Customer validation is the process of testing a business idea or product with real customers to gather feedback and assess market demand. The video gives an example of a startup that conducted customer validation at a sports event to understand the potential for their jersey rental service, adjusting their business model based on the feedback received.

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