The market is “more than big enough” is a fallacy shared among businesses coming to America. Two aspects are often overlooked: it attracts a huge number of competitors; it is highly diverse – not a uniform mass of purchasing might. Added to this is the seeming complexity of figuring market size, with mysterious acronyms like TAM and SAM. Yet, sizing markets does not require heady calculus. Though it requires effort, the end result is a well-informed view of market opportunity.
Sorting out the acronyms
Potential Available Market (PAM): the economic size of an overall market, say, the worldwide market for software. It is useful for large enterprises to know.
Total Available Market (TAM): the potential (in $ or units) within your market. Defining the “scope” of your market is important to make the estimate practical. For example, if you sell ERP software in the Northeast U.S. then estimates should be limited to ERP potential in the Northeast.
Served Addressable Market (SAM): the market potential accessible by you and your competitors. For example, the potential for cloud-based ERP software is a subset of all ERP software. Further, if the ERP software has been developed for pharmaceutical industry, then the addressable market is limited to the potential within that one industry.
Serviceable and Obtainable Market (SOM) – (aka Share of Market): an estimate of the maximum potential for an offering given the economic reach and resources of a firm. For example, the SOM for a firm with a staff of 20 selling cloud-based ERP developed for the pharmaceutical industry is substantially less than for a competitor with 200 staff. For all intents and purposes SOM = your business plan.
Available, Addressable and Obtainable mean different things
Available: represents an upper limit of market opportunity – what you could aspire to pursue long-term if you had the breadth and depth of offerings and market coverage.
Addressable: the potential of the market for you and your competitors. VCs care a lot about this as it represents the extent of the particular arena in which you compete.
Obtainable: represents what is realistically within your reach given factors such as sales coverage, product attributes, competitive entrenchment, and resource limitations.
- You must look outside. There is no way of estimating TAM, SAM or SOM without looking outside – at markets, competitors and market conditions. There are no shortcuts that lead to satisfactory conclusions.
- You must look inside, too. It is impossible to determine your SOM unless you make a thorough and honest appraisal of your capabilities.
- SOM = your business plan. Done properly (it is not difficult work, but it is hard work) the exercise effectively yields your business plan.
The bottom line
Understanding the principles of estimating market size is not difficult. Devoting the effort to do it thoroughly and effectively is the hard work. But the payoff is huge.