Many pitch decks these days include a slide labelled TAM-SAM-SOM to point out the market potential of a company’s products or services. Frankly, for me this is a big turn-off. I regard it as SPAM – totally useless and irrelevant.
If the product is a medical device, what’s the point of saying that the global market for medical devices is $X billion? How is that relevant to a heart valve? What investors need to know is who are the players in the heart valve business and how can an investee company displace most of them and dominate that market.
The acronyms TAM SAM SOM are for Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market, respectively. SOM is a subset of SAM and SAM is a subset of TAM. If you do some googling on these terms, you’ll find many different examples of how they are used. Many entrepreneurs use them incorrectly. I believe that the use of TAM-SAM-SOM had a lot to do with geography and was a practical way of fencing in one’s territory for exploitation. This would be particularly applicable to physical products. However, for software offerings such as SaaS (Software as a Service), there are fewer geographical limitations.
Entrepreneurs believe that they have to use this to attract investors and in the process they struggle with defining the three “markets”. And, the worst possible thing that they could say is that if they only had 1% of the SOM, their annual sales would exceed $50M. The best possible thing to say is how they are going to dominate their niche (define it as specifically as possible) and dominate that niche by 80% not 1%!
Investors want to know how large – in terms of potential revenue – is the niche market that is targeted. This is basically the annual revenue that can be achieved by a company and all of its competitors selling a specific product or service. However, that information is hard to get. Market research or M&A firms (e.g. the Corum Group in Seattle) may be helpful. Another way is by starting with estimates of the total potential buyers as an upper limit (in a sense that could be your TAM), then narrowing it down to those that might want and could afford it considering possible geographic or other limitations (the SAM) and then finally those that are, or could, buy (the SOM).
Angel Investor Mark Gray comments:
- Market Definition. The market in question is the market for your product/service, not the size of the industry in which it operates. I think this is one of the main faults of the TAM/SAM/SOM, that it starts with the overall industry, not the product. If your product is a widget, we want to know how many widgets can be sold, not the size of the total industry that uses widgets as an input factor. Then we also want to know whether the product is intended to replace an existing product, or creates a whole new category. If widgets are a better replacement for wodgets, then we already know the market size – it’s the size of the existing wodget market. But if it’s a brand new product category, then we have to make some estimates.
- Timing. The other fault of TAM/SAM/SOM is its static view. Whereas what we want to know is how the company’s sales will grow over time. Perhaps SOM is trying to get at this, what are potential sales. But it’s still a static view. If we want to translate market size into potential sales, well that’s what financial projection spreadsheets are for. How many widgets can you sell in 2024, 2025, 2026, etc.?