Market Opportunity Analysis
Looking to grow your company? Considering new product launches? As you are analyzing growth opportunities you may hear the terms, TAM, SAM, and SOM but what do these acronyms mean and how can you use them?
These acronyms represent different subsets of a market.
· TAM or Total Available Market is the total market demand for a product or service.
· SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
· SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.
Say your company has an idea for an amazing new premium mascara with a proprietary array of color offerings.
Your TAM would be the worldwide mascara market. Potentially, if you were present in every country and had no competition you would generate TAM as revenues. But we know that’s not the case!
More realistically, you will launch in the Los Angeles market where the demand for all mascara can be estimated based on: the population, and color cosmetic habits in other cities having similar demographics.
That is your Serviceable Available Market: the demand for you type of products within your reach. In other words if you were the only mascara in town you would generate revenues of SAM.
Clearly you’re not the only mascara available.
You can plan to realistically capture only a fraction of your SAM. Most likely you will attract mascara users in the premium segment based on your pricing and vivid color offerings for your mascara.
This is your SOM.
Ok, now let's look at why and when they matter.
TAM SAM SOM, when do they matter and why?
Put yourself in the shoes of your CEO. . You need to deliver a target return which implies both de-risking the investment early and investing in opportunities which offer substantial upside potential (i.e. huge market size).
The SOM and SAM help minimizing the investment while the TAM enables to assess the upside potential.
The Serviceable Obtainable Market is your short term target and therefore the one that matters the most: if you cannot succeed on a fraction of the Los Angeles market chances are that you will never capture a large part of the global market.
As your manager or Board, or potentially an investor, I expect you to have a realistic objective and will judge you on your ability to deliver that objective.
To be realistic your SOM needs to factor in:
· your product: people will want to buy your goods
· your marketing plan and the identified distribution channels: you have a clear plan to reach a large portion of your target customers
· your SAM and the strength of your competition: chances are that you are not going to take 50% market share within 6 months. Therefore your SOM needs to be a reasonable fraction of your Serviceable Available Market.
TAM SAM SOM have different purposes: SOM indicates the short term sales potential, SOM / SAM the target market share, and TAM the potential at scale. All play an important role in assessing an opportunity and the focus should really be on getting the most accurate numbers rather than the biggest possible numbers.