Eschew Obfuscation

TAM, SAM and SOM

Posted by Max Dunn Sat, 10 Mar 2012 16:21:00 GMT

In getting my MBA at Presidio Graduate School and working with entrepreneurs, I notice that there is usually lot of confusion over market size. In particular, many times the total market size is over-estimated and entrepreneurs don’t have a good idea to estimate how much market share they can get in the short-term.

The standard terms for this are Total Addressable Market (TAM), Served Addressable Market (SAM), and Serviceable and Obtainable Market (SOM). Here is how I explain these:

• TAM: In the far future, if your company is wildly successful and has a full line of products that dominate their markets completely, how much would your revenues be?

• SAM: In the future, if your current product offerings are wildly successful and dominate their categories, how much would your revenues be?

• SOM: In a few years, how much of the SAM can you reasonably expect to get?
  • Top-down: Take the largest, closest competitor and scale their revenues by how much money they have raised by how much you expect to raise.
  • Bottom-up: For a rough estimate, figure that the money you spend each year on sales/marketing will produce 10 times that in revenue in the next year.

Another way to think of this is to realize that investors want to know what your short-term and long-term revenue potential is, and TAM, SAM and SOM is how they do it.