TAM SAM SOM DEFINITION
The picture above is from Ligayatichy. So for now what is the definition of these acronyms TAMSAMSOM? They are subsets of a market. TAMSAMSOM inter relates to each other. They are:
- TAM stands for Total Available Market. It is the total market demand for a product or service. Furthermore it tells how many people you can possibly sell to. In easy words it means people who can buy your product under some circumstances on the planet Earth. As often you cannot sell everything to everyone. So you need to have a percentage of market that you expect to reach by marketing budget. Now the people that does not come under this percentage is SAM.
- SAM stands for Serviceable Available Market. Furthermore SAM is the segment of TAM that is targeted by products. These products and services are within your geographical reach. Moreover SAM takes all your competition into account. In other words it mean how much you can reach potentially.
- SOM stands for Serviceable Obtainable Market. SOM means how much you probably will. Moreover it is the portion of SAM that you can capture. Furthermore in simple terms it is the percentage of market that you are going to reach realistically.
The picture above is from Pinterest.
REASONS WHY DOES TAMSAMSOM MATTER?
So for now you need to put yourself in investors’ shoes. You have to deliver your investors with a target return which implies to de-risking the investment early and investing in more opportunities which offer an upside potential.
The SAMSOM helps you in de-risking the investment and TAM helps in assessing the upside potential. SOM is your short term target. Consequently if you cannot achieve your short term target you will likely never have success in global market. So initially SOM is the most important one.
Your investor will want you to have a realistic objective. Furthermore he will judge you on your abilities to fulfill the objective. To be realistic following factors are important for SOM:
- Your Product
- Marketing plan and distribution channels
- SAM and strength of competition
Once you have achieve your SOM your investor will never leave you. In the same way SAM assesses the likelihood of achieving market share implied by SOM. Furthermore your achievement of SOM will help in the greater penetration of SAM.
Furthermore once your investor is familiar with your capabilities. So now he will be looking forward to how you expand and increase company’s penetration within TAM. The picture below is from Startup School.
HOW CAN YOU CALCULATE TAM SAMSOM?
Let us have a numerical calculation of TAM SAMSOM. So you have an investor whose target return is 10x. Furthermore you are looking for $250k investment in exchange for 20% startup. On the basis of your market research and business plan we can assess that as:
- TAM= $5bn
- SAM= $100m
- SOM= $10m within 2 years
- EBDITA margin= 30%
- Valuation at exit= 8x EBITDA on the basis of value listed companies within sector
So once you deliver $10m in revenues the EBITDA is $10m revenues x 30% margin= $3.oom. Furthermore the company is worth 8 x $3.00m EBITDA= $24m. The investor return is $10m and 20% ownership/$250k investment= 8.0x.
Consequently once you have achieve SOM the investor will have his target return. Now he is left with a company which have achieved 12% of market share on a segment. Furthermore it represents 5% of TAM of $5bn.
This was all about TAMSAMSOM. I hope the method of calculation and its importance may help you in future of your business.