Every entrepreneur is asked the basic question, “How big can this business get?” and the response must be persuasive and calculated. The answer delivers the market size and the potential revenue that the business can attain if the market is fully captured and turned into paid customers.
This is a very compelling component of a pitch, likely to an investor who is considering to financially support the company to attain that market penetration goal.
Over time, market sizing has established standards. These terms are TAM (Total Addressable Market), SAM (Serviceable Addressable Market), SOM (Serviceable Obtainable Market), all are interrelated and all are important to understand how they are calculated.
TERM + CALCULATION
PURPOSE AND INSIGHT
TAM
TOTAL ADDRESSABLE MARKET
Total Addressable Market (TAM) =
Total Available Population * LTV of Product or Annual Revenue
The absolute maximum amount of revenue your business could make. It is the upper band on growth potential. That means the most customers paying the highest amount.
This has got to be massive to attract institutional investors. You may also be asked what is the growth rate of your market size, so know the CAGR.
SAM
SERVICEABLE ADDRESSABLE MARKET
Serviceable Addressable Market (SAM) =
Total Potential Customers * LTV or Average Annual Revenue from Customers within the market.
Measuring the segment within the total market that fits your likely customer profile. This could be geographically restricted, ability to purchase, ability to access. Capture these reasons and use that to count the base. Then, use a realistic price point, not the max.
This also defines the Share of Market (divide the SAM market count by the TAM market count).
SOM
SERVICEABLE OBTAINABLE MARKET
Serviceable Obtainable Market (SOM) =
Total Initial Customers * Average Annual Revenue from these Customers by selling the CURRENT Product or Packaging.
Carve out from the SAM the realistic group that you can likely convert into customers within the next year. Use this number as your target base (again great market segment definitions help with asserting your estimate is realistic and defined). Then look at your CURRENT pricing packages, pick the most popular price point (not the highest) and multiply that by that base number.
This also becomes your sales goal on customer base growth and revenue for the next year!
HELPFUL TAM, SAM, SOM AND MARKET SIZING RESOURCES
Hen House Ventures is here to educate founders and validate their work to ensure that what they say publicly is true and trusted. We offer an online education module as a part of the Deck to Deal covering Market Sizing. This online module is a deep dive on the concept of market sizing, further definitions and calculations, and what the investor is looking for when you talk about market sizing. We also provide you with sample TAM SAM SOM templates (as the above example is just one of several ways to visually communicate this point, we show you samples of Market Sizing slides from other companies’ investor pitch decks, and we also walk you through a series of questions that will produce accurate calculations, definitions, and a presentation. It’s totally worth it!
DECK TO DEAL MARKET SIZING MODULE
If you want to read more about Market Sizing, check out Liveplan’s blog article. They do a great job explaining how TAM SAM SOM affects your business plan.
We also like the Lean Plan’s article about TAM SAM SOM as it crystallizes the valuation and opportunity in a straightforward approach.