How to calculate your startup’s TAM, SAM, and SOM – TechCrunch
Understand and present the size of the market you are targeting is critical to securing funding for your business. Angel investors and VCs want to see a breakthrough product or service that scales and can gain a significant share of a significant market.
At any stage of investing, whether seed or Series B, it is necessary to include a slide in your presentation that explains your market size from three perspectives: TAM, SAM and SOM.
When you present your market size data to investors, they look for TAM, SAM, and SOM information. These data points hold a mystique of numbers that may seem colossal and out of reach, but if you approach market size methodically, you’ll realize that it really isn’t that complicated.
I recently attended a presentation from a company that produces innovative, nutrient-dense olives and peppers. Because their data point scenario is simple and easy to understand, I’ll use it here to explain their TAM, SAM, and SOM.
Step 1: Capture the TAM
While the TAM (total available market) tends to cause the most anxiety, it is the easiest data point to manage. TAM describes total revenue in a larger industry. You can calculate TAM in three different ways.
The first is the top down approach, often obtained through publicly available market research reports or extrapolated from publicly available data reports.
Then comes the an in-depth approachwhich is based on a calculation of actual and projected prices, as well as current and total projected usage of your products or services.
If you do your homework, you’ll take the guesswork out of financial projections, show potential investors how they can benefit from investing in your business, and put you in the best possible position to achieve your goals.
The last is the value theory approach. This theory applies an informed analysis of the projected value and expected total use of your product or service, then calculates how much of that value can be reflected in its price. The theory of value most often applies to entirely new products, services and categories. Let’s apply the theory to Airbnb.
Airbnb shook up the hospitality industry by dreaming up technology that would allow owners to connect with travelers looking for a place to stay. To apply the theory of value, assess how much a traveler would be willing to pay for this new type of accommodation, how much the owner would like to be paid per night, and what Airbnb might collect from the owner for using their technology.
When a product or service category has already been extensively researched, the MPR is often calculated using publicly available market research reports. If the product or product category is new and hasn’t been thoroughly researched – which often happens in tech and applies to other industry verticals as well – I recommend hire a seasoned market research consultant to secure TAM data using bottom-up or value theory. approach.