If you have spent any time in the startup financial world, TAM (Total Addressable Market), SAM (Serviceable Addressable Market), and SOM (Serviceable Obtainable Market) have no doubt crossed your desk.
Calculating TAM has become a must for any startup hoping to secure funding. The goal of these slides is to convince investors that you can capture enough market share in order to be profitable.
For seed-stage startups, TAM will almost always be wildly inaccurate. The size of your market is just as much a factor of your marketing strategy as it is the ‘size of the industry’. Thus, calculating TAM without a proven marketing strategy is futile.
Although TAM may still turn a few heads it will not contribute to good decision-making. During the early formation of a business, more useful data is required. I’ve broken the mold to develop an alternative formula for creating efficient early marketing data.
It looks something like this:
This model still begins by taking a stab at Total Addressable Market but changes the way you define its subsequent parts. It is designed to help inform better marketing decisions instead of being a product of your current go-to-market strategy.
Here is the breakdown:
- Total Addressable Market (TAM) — Everyone experiencing the problem you are trying to solve who has the ability to obtain a solution.
- Serviced Market (SM) — Everyone experiencing the problem that already has a solution.
- Current Attainable Market (CAM) — The percentage of both the currently serviced, and currently unserviced markets that you are able to reach.
This version of TAM will reveal the viability of your business plan. If the results are disappointing, it is a clear indicator that your customer personas, marketing plan, or go-to-market strategy need revision. Doing this before a period of growth will help catch errors in your plan before they become expensive — and potentially devastating.
It takes longer to calculate TAM, SM, and CAM. However, it produces data that can inform good decision-making for the foreseeable future. To find these numbers, use the following method.
TAM
Defining who is experiencing the problem that your business solves is priority number one. This is effectively done by asking the following questions.
- How many people are experiencing your problem?
- How many of them care enough to pay for a solution?
- How many have the ability (geographical constraints, lack of internet connection, language barrier) to find a solution?
- How many have the budget to pay for your solution?
Breaking each of these down into smaller parts may help with accuracy. For example, our first question (How many people are experiencing your problem?), could be broken into the following:
- What age groups experience this problem?
- Where do people experience this problem live?
- Where/how do people with this problem spend their time?
When finished, your TAM may look something like this:
Where you find this data is highly important. I would start with census data, then move to data sites like Statista. That combined with data that you gather from speaking with your potential customers can create a clear picture of where you stand.
SM
SM (Serviced Market) represents a percentage of the total addressable market that is already being served a solution. They know that a solution exists and are willing to pay for it.
Your job is to find these customers and convince them that your solution is better. The size of your SM should inform your marketing strategy.
If the SM is over 50% of TAM, then your marketing plan should include ways to steal customers from competitors. If the SM is only a small fraction of the total TAM, your competitors have failed to reach the majority of available customers.
If you can determine methods of reaching segments that have previously gone untouched you will unlock the value of being first to market (at least for those customers).
This data can be found by researching competitors and estimating the size of their customer base.
If you believe that you do not have competitors you are either wrong or no one cares about the problem you are fixing.
It may be possible that you do not have directed competitors, but solutions to your problem still exist unless you are solving mortality. Uber had taxis to compete with, Tesla still has Ford, and even Amazon still has Barnes & Nobel.
CAM
Your Current Attainable Market (CAM) is the number of people you can reach right now. The formula for this is only viable if you have proven data that you believe to be scalable.
Finding an accurate CAM means more research, data, and testing. If you have already run testing in one city and found that $1,000 in ad spend produced 20 paying customers, scale it up to include larger areas and amounts.
If you have not started testing you can speak to potential customers about their needs and budget. That data can be used as a replacement for an actual test but will not be as accurate.
Tying Everything Together
This method will accomplish three things.
First, you will discover the size and shape of your market. You will know your customers better, you will be more familiar with the competitive landscape, and you will have a better idea of how to position yourself accordingly.
Second, you will know if your model is sustainable. You may need to put more spend into taking competitors’ customers and less on the high cost of educating new customers, or vice versa.
Third, you will have proven data to show investors. The numbers you present will not be based on real-world data, not wild assumptions. Investors are not stupid. They may be impressed by inflated numbers initially, but will quickly reject them during due diligence if the data is not substantiated.
If you would like to talk more about your TAM and how it best fits into a pitch, feel free to submit your deck here, and ill give it a glance.
In your pitch deck appendices, you can now include robust background data on how you came to your conclusions. From my time in the VC world, this is one of the biggest differences between successful raises and rejected projects.