TAM / SAM / SOM: A "Revenue Officer's" Perspective
TAM / SAM / SOM – A "Revenue Officer's" Perspective
This is a “hot mess” of a topic. It’s poorly understood. Poorly used. Drives many Founders to distraction. And even some investors / advisors don’t approach it in a practical, productive fashion.??Loosely speaking the TAM / SAM / SOM exercise is meant to:
1)???Establish Market Size
2)???Identify Target Beachhead
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But are you calculating “Top-down?” “Bottom-up?” And is this ultimately some pointless exercise in abstraction. Is it even “actionable?” Does it serve a purpose for the Founder beyond pleasing an investor??
The answer is “Yes.” However, it certainly requires some clarification. And perhaps a new interpretation. Which we’re going to share in this two-part Article.??In Part 1 – we’re going to revisit definitions.???In Part 2 – we’ll share a couple of “Pro Tips” on how to measure market potential.??
PART 1 - HOW TO DEFINE TAM / SAM / SOM
Let’s start with the definitions.??They’re often conflicting and vague.??We’re going to use an example to bring clarity.?You’re selling construction management software with English translation only, configured for Canadian and US payroll / tax codes.??Your pilot clients have been primarily in the residential high-rise construction space.??But there is a potential that you could introduce future translations and jurisdictional labour codes.??And your platform (perhaps with some modification) could serve residential, commercial and industrial projects of all kinds.??Here’s how a revenue officer might better define TAM / SAM / SOM:
Total Addressable (Available) Market (TAM) --??Every potential buyer in the world who might think about buying the general “type” of thing you have to sell.??For our example, that’s all contractors, subcontractors, and trades around the world, regardless of language, who are building residential, commercial, industrial properties.
Serviceable Available Market (SAM) – Every potential buyer in the world who might one day think about buying from “you” specifically based on the general state and potential of your product.??All “English-Speaking” contractors, subcontractors, and trades in Canada and the US.??(You may choose to remove Quebec.) Residential, commercial, industrial projects.??Some often define SAM as the market you can “reach.”
Serviceable Obtainable Market (SOM) – This last one gets confusing for many.??Some define this as the percentage of the “SAM” that you think you can “capture.”??But over what timeframe? 5 years? 10 years???Through the life of the company???Are we talking about a “probable” percentage based on current product state (i.e. your working MVP), a modest growth rate assumption, and your near-term team capacity and resources???Or are we talking about “potential” percentage based on an evolving product road map and scalable resourcing over time? (In which case your SAM may also be changing.)??
In short, this number could be all over the map.??It's a groundless "crystal ball" statement that really does nothing to serve the investor, the Founder, or the CRO in any real practical, "actionable" fashion. And it will almost certainly change within 12-24 months depending on what you do with your product and how the market responds - both buyers and competitors.??Which is why we think this definition for SOM leads to a very confused discussion.??
Moreover, when talking about a “capture” percentage, what we’re actually talking about is a strategic “goal” – something that can only properly be explored through multi-year, scenario analysis using a pro forma.??It’s NOT, however, a quantification of your targetable beachhead market.??And yet, quantifying an immediately targetable market… including sheer number of prospective buyers… is far more relevant and helpful for both the investor and the CRO responsible for revenue generation. Our belief, therefore, is that SOM should be restricted simply to identifying and quantifying the most exacting market segment(s) you should be targeting in your next 5+ years of operation. Estimate the size of the pond(s) you immediately expect to fish in, NOT how many fish you expect to catch. Leave that second discussion for your "traction and trajectory" narrative illustrated in your pro forma. Because you'll be running a bunch of scenarios based on all kinds of different assumptions.
So what's an alternative approach? We would much prefer to think of this last one… our “SOM”…??in terms of every potential buyer who is likely to buy from you “right now” based on your immediate success, proven case-studies, and perceived market specialization.?If we had our druthers, we would call this “TOM” – Targetable Obtainable Market.??In other words, “Who would I target, TODAY, knowing I have a very high probability of closing them TOMORROW?”
In the case of our construction management software example, that would be all English-speaking Canadian and US general contractors, subcontractors, and trades currently involved in residential (and potentially commercial) high-rise construction.??(If all my case-studies have been exclusively in Canada, then I might even be more conservative and say Canadian targets only.)??These are the buyers you have the highest probability of selling to and closing… TODAY!??This is where a hunter will hunt!??Because this is where revenues and commissions can be made, right now, given the state of the product, your real-life “traction,” and the resulting conversations you’re more easily able to trigger. A sales professional won’t waste their time on anything else. Because you’re not qualified to do so in the eyes of your prospective buyers.??A Founder should be thinking the exact same way.??And also investors.??If you don’t like the size of??your SOM using this alternate definition, then you should be asking yourself whether you actually have a legitimate MVP, along with some proven case-studies, to even enter the market in the first place.??Are you actually ready for launch???If you realize the answer is “no,” then in reality, you’re not in a position to quantify any type of SOM no matter which of the two definitions you prefer.
Now one additional point regarding how different Founders might present their SOM as a percentage number over time.??With the former definition of SOM, what you’re actually saying is that you intend to capture 100% of that SOM within some specified timeframe (5+ years?).??With the latter definition of SOM… the one we endorse… what you’re now presenting is (hopefully) a scenario where you’re telling an investor you only need to capture a modest percentage of “SOM” to break-even, and still have plenty of the SOM (and SAM) available for expansion and broader market penetration, depending on your strategy and product development designs.???Again, in our view this second conversation is far more informative and “actionable” for the investor, the Founder, and the CRO.
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So how do you handle the definition discrepancy???In the end, you’re welcome to run with either approach.??But be very clear with your definition up front when delivering it to any audience (internal or external).??And if confusion persists,??switch to your pro forma.??Because if you’ve convinced an investor that the market is “Big,” then what you should all be thinking about is your very real plan for “traction and trajectory;” for customer acquisition = SALES.??Forget the abstract pie chart.??Get into a real conversation, using your pro forma, about MAKING MONEY!?
PART 2 – “PRO TIPS” ON MEASURING TAM / SAM / SOM
Switching gears, let’s spend just a bit of time on how best to “measure” your TAM / SAM / SOM figures.??Here are a couple of “pro tips” to bear in mind when estimating and presenting the numbers.
1)???MEASURE BOTH VOLUME & DOLLARS – Don’t just measure TAM / SAM / SOM in terms of dollar value.??That statistic alone is not helpful.??Nor is it “actionable.”??Yes – it gives you a general sense of revenue potential.??Beyond that, it’s abstraction.??Identifying the volume of prospective buyers, on the other hand, is a far more essential step towards market activation.??Because you’re targeting actual people, in the end, not dollars.???How many are out there???Where do I find them???How do I reach them???How do they buy???This is why CROs think in terms of “Dollars and Doorways.”??It’s not just the amount of money in the market that represents an essential part of your market assessment,??but the number of different ways it can be accessed.??To provide an extreme example, you might be chasing a $1 billion market.??But if that potential spend is controlled by a single individual, and that individual is your worst enemy, then you effectively have no market at all.??So, again, always measure TAM / SAM / SOM using both a dollar and volume-based metric.
2)???MEASURE DOLLARS IN TERMS OF MONEY DISPLACED – Remember that you can’t print money.??It doesn’t grow on trees.??Any time you attempt to sell something in the market, you’re diverting cash from a pre-existing budget (or some other pool of discretionary cash).??If customers are buying more of what you have, they're buying less of something else. Be sure to think of it in those terms.??If you arrive in the market with an alternative solution in a well-established market (e.g. a new type of perfume), then you’re attempting to capture and displace a portion of a well-established perfume and cosmetics market.??Those numbers are pretty easy to find.??That’s your measure of the market.??In some cases, however, you’re selling something the world has never seen before.??There is no pre-existing budget.??But the money needs to come from somewhere.??So ask yourself, what budgets could I be displacing? Which in turn requires you to ask, why are prospects buying your innovation and what's the economic "value" it represents to them???Is it because you can help them make new money with your innovation???Is it because you’re helping them save money across some other pre-existing budget category???Or could you be helping to completely eliminate a traditional cost category, and once again allow the buyer to save money???If you fall into any one of these scenarios, then your TAM / SAM / SOM is based on a percentage of the net money you’re helping your buyers either make, save, or both.?But what your also doing in the latter two case is taking a percentage of a pre-existing budget that you've displaced.??If, for example, you think your solution could save buyers $20 billion across the globe by allowing them to stop spending money on an older way of doing things, and your pilot customers are allowing you to charge 20% of those equivalent savings as your service fee, then you’re creating a new market with a potential value of $4 billion in redirected spending.??As a final example, think about what happened when the mechanized tractor replaced the farmer’s plough.??What budgets were displaced???Cost of the plough, horse/oxen, oats and hay, water, grooming, ferrier, vet checks, leather tackle and harness, barn bedding, barn repairs, and all of the equivalent labour and time required to maintain live animals.??Plus, what is the enhanced productivity that a farmer will achieve by introducing a mechanized tractor???You can lay claim to some percentage of those cost savings.??Plus, you can also lay claim to some percentage of the enhanced economic output of the farmer.??That’s a new “pool of cash” that didn’t exist in the farmer’s revenue budget before.??All of those factors should help you to measure your TAM / SAM / SOM.
Final observation – Are these numbers easy to calculate???No.??Not always.??Most especially in the scenario where you’re effectively “creating” a new market by completely redirecting (and essentially eliminating) old budgets, while also enhancing productivity (e.g. tractor vs. plough).???In many instances, you’re approximating and inferring.??But in the end, ask yourself the following:
1)???Can I clearly identify budgets I’m diverting or displacing??
2)???Is the SAM (Available Market) really big???Even before the Total?
3)???Are there are lot of potential buyers in the Available Market?
4)???Do I have a SOM (beachhead), representing a good percentage of those buyers, that can serve as a clear entry-point, and get you to break-even and beyond?
If the answer is “Yes,” to all four of these questions, then you’ve past a critical test as far as a CRO is concerned.??Why???Because they see a very real and sustainable path to revenue, commission, and “food for the family. “??Trust the hunter’s instincts.??It’s wired for survival.
For a second opinion, read the following blog:
And remember…?
“Without sales, or else fails!”