Anyone working on a serious business plan will bounce into the inevitable question of what does SAM mean ?
The Served Available Market (S.A.M.) simply refers the number of customer you can serve within the market you are working on, and in regard to the solution you are providing.
Let’s take a theoretical example : let’s say you’re planing to sell a dating app. The market is composed of 20 million people (typically men between 25 and 30, located in the US). You analyzed the fact that they spend in average $10 per year on dating apps, so your TAM (Total Addressable Market) is $200 millions (20M x $10). BUT, right now, like every startup, you’re broke, so you only plan to sell iPhone apps. In this example, if the TAM is $200 millions, your SAM will only be a part of the market – because only a portion of your potential customers are using iPhones. You would need to figure out the percentage of people using iPhones and make an estimation of your SAM in USD. The SAM is always a fraction of the TAM.
Let’s take a real life case
The company I’m thinking of is selling software to French businesses ; let’s take a look at what the TAM is in that case :
In this project, we initially start by finding out who want to sell to : french businesses. There are 3.15 million businesses in France but not all of these are going to be interested by our products. So let’s first narrow down the TAM to the businesses that could address the problem we’re solving.
That’s the biggest companies in france (243) + the intermediary businesses (4794). So a total of 5037 businesses. We could have some Small Businesses interested but it’s nor our main target, so we’ll leave them on the side for now.
So, to increase our chances of success, for the product we’re currently targeting, we’ll only concentrate on the biggest businesses so : 243. In this example our SAM is 4.8% of the TAM (5037 businesses) for our solution.
Once we’ve done this, the next step will be to extract the list of these companies, so we can start working on the first 243 that will be our first target customers :
At this point, we lack information about the dollar amount spent by each customer on the problem we will be addressing. So for now, we’re bound to make an hypothesis about it that we’ll validate later.
Is your market big enough ?
The whole point of this calculation is to find out if the market you’re targeting is big enough and at the same time actually… not too big. The reason we do this calculation early on is to get an idea if the efforts we are about to make are really worth the challenge.
Because if the market is too big, it is unlikely you will have enough ressources to complete with big players who already have complex funnels in place and can burn a ton of money to acquire new customers. This ends up a costly situation because without a capacity of attracting new customers on a regular basis at a reasonable cost, it will be impossible to scale the business. Imagine that a big company is spending $100 on average to acquire a new customer. They are selling on average 3 products to get their money back. That means you’ll have – not only to create 3 successful products – but also massively test each distribution channel before you reach the level of precision they have. That can take a lot of time…
On the other hand if the market is too small, then the entreprise will be forever limited. I’ve personally experienced this and i can tell you is is a VERY frustrating experience, because once you’ve reached critical mass, there is just no way to grow beyond changing entirely the business model.
Please avoid my own mistake 🙂
How to research your market (TAM, SAM) – the theory
The first thing would be to start analyzing how many potential customers are in your market. There are basically two ways of doing that : top-down approach and bottom-up.
The first point is to determine how many users meet your characteristics from top to bottom. So for example, if you’re targeting you males in US, you start by how many people are in the US, then how many men/women. Then a population segmentation chart :
So we’re around 11M. From there we would need to find out how many males from 25 to 30 are singles. And maybe sub segment the market, and take a look at how many are singles for more than one year, 2 years, 3 years, etc. That would give us a better visibility of the market, since the needs of these potential customers probably won’t be the same.
This method of calculation is only a first indication and needs to be done at the same time as a bottom-up analysis, because there is a risk to overestimate the market size. But still, it gives some good indications to start with.
How to hack Facebook to calculate your market in no time
Let’s take our example back to our dating app. We’re targeting males from 25 to 30 living in the US, and speaking english. The tool narrows down to around 9M people we can reach :
The interesting thing here is that some of these people indicate their relationship status on their profile which gives us an indication of how many people we can market to :
Now combining these 2 criteria, we have a tool to start marketing to our potential customers. Pretty interesting and fast way to test our assumptions !
Now, calculate the cash flow
Once you have an idea of the population of your TAM, the second step is to find out how much money each of these users is spending. This will allow you to calculate the TAM and the SAM in dollars per year.
In order to do that you’ll need to find out in particular :
- how much they have spent in the past to solve their pain points (the problem you’re solving)
- how much they are spending today to do what your product proposes to
It’s not necessarily easy to come up with precise numbers. So, at some point, assumptions needs to be made about how much a customer is willing to spend and that’s ok. It can be noted as part of the business plan, and as to be verified later through experiments.
Do you have a good SAM?
Typically the if the TAM is under $5M per year then it’s likely the business will run into important scaling problems. Generally a SAM between $20M to $100M is a good target. It’s accepted that over $1Billion the market is either too big, or the SAM is not precisely calculated.
SAM to SOM
So the last indicator you will need once you have acquired enough market data to establish your TAM and SAM, is the Share of Market (SOM). The SOM is the percentage of SAM a company has, or plans to have.
So recap : TAM is the global market, SAM is the market for your product, and SOM is the market share your company has within the SAM.
Typically, to determine how much market share you can have you need a different approach than just a wild guess. The SOM has to be analyzed bottom-up : how will your marketing strategy will lead you to get these market shares. For example how many sales professionals will you need to get leads. And how many leads can you convert within the year.
Let’s take a real life example of how to calculate the SOM with our software company. Our first marketing strategy will be to organize a seminar on the subject our software will provide solution for. It’s realistic to say that we can organize 6 seminars per year, and gather 20 people on each of these events.
Here’s a breakdown of the costs per events :
- Rent a conference room for 20 people with coffee – 1500€
- Advertisement – 1500€
Provided we have a good targeting, that’s a total of 120 prospects we can talk to directly and present our solution for an immediate cost of 18.000€. Out of these prospects we will need a sales team of 3 people to work with to close maybe 3 clients within the first 12 month – for an additional cost of 450.000€. We need to validate this strategy in order to make sure it works, before we scale it, so it’s unlikely that our TOM for the first year will be more than 1.2%.
This is a conservative forecast and it’s reasonable to think that we can beat that, but still the first 12 month of activity will be pretty challenging because of the need to understand the sales cycle.
If you are forecasting your TOM beware that reaching over 10% will raise suspicion and will require justifications. It’s much better to take conservative numbers and have a realistic step by step marketing strategy than have bad surprises.
The more precise you will show you can reach the targeted TOM with the marketing strategies the most likely the business is to succeed within the numbers planed. Also note that the assumptions here needs to be traced and validated at some points through experiments.
This will help you to lower the risk of each assumption and get a more realistic vision of where everything is going.
Conclusion : what does SAM mean (for real)
Calculating the TAM SAM SOM is an important exercice because it allows an entrepreneur to have a visibility over the general metrics of his market, while starting to imagine specific strategies to reach new customer and make a financial assessment about how to get there.
There are many tools to do market research but my favorite is to play Facebook ads because it already gives a practical way to reach people right now.
Once you’ve calculated your TAM, SAM and SOM sum everything up into a single ppt slide. Check AirBnb’s Pitch desk for example, on how they summarized their TAM, SAM and SOM :