Need Capital but having a hard time convincing the investors? Did you do the TAM, SAM, and SOM right?
Taking a new business off the ground is a unique experience for everyone. Some of them have it seamless and others stride through various complications. Just having a great out-of-the-box idea would not suffice, it is equally important to present the feasibility of your idea via thorough market analysis. So, a good reality check completed before making your investor pitch would definitely help you stand out.
Caution: This post is for beginners only and for the entrepreneurs writing their own business plans. Miscalculating these metrics may impact your whole investor pitch in a negative way. Include these only if you are confident in the research performed by you, else seek professional guidance from professional business plan writers who perform market research.
Are you struggling to raise funding for your business? Your investor has just asked you to provide TAM, SAM and SOM?
Here are 3 magic metrics to help you determine the worth and feasibility of your entrepreneurial idea.
TAM (Total Addressable Market)
TAM is the total number of customers in the market who needs the product or service you offer.
Simply put, it is the potential size you can achieve if you acquire 100% of customers. Therefore, TAM is achievable only if you are the sole provider of a product in the market.
Because a monopoly is not the norm of the world anymore, there would be a competitor present in the market oftentimes. Hence, within the realms of possibility, you would only occupy a certain portion of TAM.
Importance of TAM
Although unattainable, TAM still upholds great importance because it helps to determine,
- The total market size of your product/service
- Potential business growth possible
- The competitiveness of your product/service.
- The untapped customer segments left untouched by your or your rivals.
- Ideal revenue, a business can target when it is in a full swing!
SAM (Serviceable Available Market)
As mentioned above, only a fraction of the above total demand could be your target customer depending on the accessibility and affordability of your product or service.
Chances are that you are not the only business in the market and part of the market share would be captured by them already. So, the customers who needs and can afford your product/service would be your ideal market, called SAM or Serviceable Available Market.
Importance of SAM
- SAM determines the revenue share you can possibly achieve in a short to medium term.
- It helps you develop your niche market by differentiating your customer segment based on demographics, such as age, gender, income levels, technology, geography etc.
SOM (Serviceable Obtainable Market)
Your business would generate SAM only if you capture all the ideal clients for your business. In the beginning years of business, owing to the limited visibility in market, minimal service capabilities, and lean resources, you can only access a portion of your customers called SOM.
Following factors determine why customers would choose you over others that you can use to your benefit for maximizing SOM,
- Unique value proposition,
- Better pricing,
- Personalized services,
- Exceptional customer service, etc.
Importance of SOM
- The more attainable your SOM is, the easier it would be to make claims before your investors that how much earnings stated in SAM or TAM are achievable.
How to calculate TAM, SAM?
There are two approaches to calculate TAM, SAM.
- Top-down approach
- Bottom-up approach
(i) Top-down approach
TAM calculated via the Top-down approach would be the total no of cross border payments made by small businesses in a particular geography. It can usually, and easily, be obtained from publicly available government statistical data or industry reports.
(ii) Bottom-up approach
Another way to approach TAM is by doing a bottom-up study of revenue generation. It presents a more accurate hypothesis of your business case.
Because it takes into account the exact first-hand information of the business itself to reach the numbers based on its limitations in initial years. This cannot otherwise be effectively represented via general industry figures.
Therefore, collect the following numbers as correct as possible.
- Pricing options
- Other Revenue generating statistics, such as your profit margin, frequency, and amount of similar transactions completed in your industry.
- The number of customers you plan to attract within a certain period of time – could be a few months or 1 year and so on.
For the Bottom-up approach, as per the above directions, you would need
- The number of businesses that can use your product.
- Pricing options- say there is a monthly subscription for $100 to do x number of transactions.
TAM can be calculated as No of businesses * Revenue generated per customer.
Similarly, for SAM,
Say 80% market share is held by your competitors. Then,
By top-down approach, SAM= 20% X TAM.
By Bottom-up Approach, SAM= No. of businesses X Revenue from each customer X No. of customer you can reach in a particular period of time.
Why is it so important to include TAM, SAM, and SOM in your business plan or investor pitch?
The most daunting task is to convince investors to believe that your business idea would do wonders and they should back you up via funding. Given that it would be their money at stake, investors would only believe the numbers you present to them regardless of the emotional pitches you are going to make.
Funders are primarily interested in the following few things that demand close scrutiny in market research,
- the guaranteed return on their investment,
- to demonstrate that the market share is profitable, and
- the expected market share is big enough to expect the stated returns.
This can be best portrayed by developing an excellent TAM, SAM, and SOM metrics to arrive at the estimated market size.
These are often the most miscalculated or ignored numbers presented before the lenders and investors. However, a slightly extra emphasis on these figures can make your stance more credible and help to secure the much-needed funding for your startup.
Comprehensive market research is always very crucial to address funding roadblocks. It should closely address the risks of investment and the potential of returns on investment to make a convincing claim before investors.
Let’s get it right to get on the track! Don’t settle for less on these metrics. Ask professional help if required and bounce back with facts that are not only appealing to funders but also realizable!!
Maroof HS CPA Professional Corporation provides an outstanding business plan writing services in Canada. Our home is in Toronto, but we write business plans for all the banks, investors or immigration in Canada. Get in touch with us.