When assessing a startup's pitch deck, one of the most important things that investors must look at is the market size.
Total Addressable Market [TAM]
Refers to the total market demand for a product or service. It’s the maximum amount of revenue a business can generate by selling its product or service in a specific market.
Serviceable Addressable Market [SAM]
A serviceable addressable market is most useful for businesses to objectively estimate the part of the market they can acquire to figure out their targets. Due to the limitations of your business model (such as specialization or geographic limitations), startups may struggle with the total addressable market.
Serviceable Obtainable Market [SOM]
A Serviceable Obtainable market is most useful for businesses to determine short-term growth targets. It can also help with competitive awareness and strategizing. Even if you only have one competitor, it would still be extremely difficult to convince an entire market to buy your product or service. That’s why it’s crucial to measure your serviceable obtainable market to estimate how many customers would realistically benefit from buying your product or service.
How to Calculate TAM, SAM, and SOM?
TAM
# of Customers in a Market X Annual Value per Customer
Example:
For a market of 5,000 customers at $2,000 AVC, the TAM would be $10M.
SAM
Target Segment of TAM X Annual Value per Customer
Example:
Only 2,500 of the 5,000 potential customers live in the geographical area that your business caters to. With a $2,000 AVC, the SAM is $5M.
SOM
Last Year's Market Share X This Year's SAM
Example:
Last year's SAM was $3M and your revenue was $2M (75%). If this year's SAM is $6M, multiply that by 0.75. This equals a SOM of $4.5M.
*The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
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