Understanding TAM, SAM, and SOM in Startups
As a startup consultant, one of the key requirements you will come across is the need to give your Total Addressable Market (TAM). However, it is essential not to forget your Serviceable Addressable Market (SAM) or your Serviceable Obtainable Market (SOM). These terms may seem like confusing acronyms, but they play a crucial role in determining the success of your business.
Your TAM refers to the total market demand for your product or service, assuming 100% market share. On the other hand, your SAM is the serviceable addressable market, usually valued at a dollar figure. It is the geographic region in which you operate and can realistically capture market share. Finally, your SOM is the actual portion of your SAM that you can capture.
It is important to note that TAM, SAM, and SOM are dollar figures over time. You may think you can get a certain amount of money in the first year, but in reality, it may take two, four, or even six years to achieve that figure. Therefore, it is crucial to have a well-thought-out plan that factors in the timeline of achieving these figures.
When discussing TAM, SAM, and SOM, it is essential to understand that there is no right or wrong answer. For example, when people ask about Uber’s TAM, there is no one answer. Uber has democratized travel, allowing people who never took taxis or did not own a car to use their service. Therefore, it is crucial to explain how you arrived at your figures and your thought process behind them.
Additionally, it is essential to consider how you compare yourself to competitors when determining your TAM, SAM, and SOM. You need to consider your geographic reach, your target audience, and your market segmentation. Your approach to these factors should be well-organized, ensuring that you have a clear understanding of your addressable market and how you can realistically capture it.
As James Sinclair, a startup consultant, rightly points out, acronyms can be confusing and frustrating. However, understanding TAM, SAM, and SOM is crucial to the success of your business. Therefore, it is essential to take the time to explain these concepts to your team, advisors, and investors, ensuring that everyone has a clear understanding of your market strategy.