You wake up thinking about what needs to be done. You work twelve hours or more a day to bring your product to market and you go to sleep thinking about what can be improved. Your life as an entrepreneur is dedicated to your dream and when so much of your life is committed to your start-up you owe it to yourself to understand the potential value of your commitment. Most entrepreneurs will not be content to open a neighbourhood shop – they want to build the next Amazon!
When your idea is truly innovative it’s hard to know how large it can become. Initially your resources are limited, but how large should you plan to be? TAM SAM SOM to the rescue.
TAM means Total Addressable Market
This is the measure of how large a new business opportunity your idea could create. If your idea is innovative then it is unlikely that analysts are measuring your opportunity precisely and so you need to estimate the TAM. You can start with the number of people or businesses in the world that have the problem you are trying to solve, multiply that by the amount that potential customers might be willing to spend to achieve to arrive at a ballpark estimate of the value of the potential market.
The definition of TAM includes all the value which your competitors hope to capture as well as types of business which you cannot yet address. Perhaps some customers will only buy on consumer credit and you do not yet have the facilities to offer credit finance. What can you do? – this leads to the SAM.
SAM means Service Available Market
Taking account of your business model, the type of product you have, the depth of relationship you will have with your customers and the risk of new entrants to the market, SAM measures how much of the TAM you can realistically expect to achieve in the long term. If you expect to have only four competitors, then perhaps it is realistic to capture your fair share, 20% of the TAM. Most markets are not like this. One competitor may take more than 50% of the market in China; another may deliver to small customers everywhere in the world with a web service. However, the market is structured the SAM is your best estimate of what your idea can achieve within the fundamental constraints of your business model, the technology you are using and the channels to market you can potentially use. In reality you have resource constraints.
SOM means Service Obtainable Market
Given the resources you have and can develop in the next few years, how much of the SAM can you turn into revenue? Although this is the most immediate measure it is the hardest to calculate because you need to guess how much capital you will be able to raise and how efficient your sales and marketing will be in turning sales and marketing costs into revenue. Of course, there are rule of thumb metrics to help you but because you are in a new innovative market, which you are creating, nobody really knows until it is done.
The SOM is what is reflected in your Business Plan and the basis for the projections you will share with potential investors.
As a concrete example, DAZN, the over-the-top subscription sports streaming service, first launched in four countries in 2016 and is now available in nine. Its target is 20 million subscribers in 20 markets by 2021/22 and its SOM has been increasing year on year by acquiring more sports rights. For instance, boxing was the entry ticket to the American market but they made it clear that they wanted to offer a load of other sports over time, such as Major League Baseball. In January, DAZN reported that it attracted a record consumption in 2019 with 507 million hours streamed, an increase of 98 per cent from the 256 million hours streamed in 2018. SportsPro Media reported that DAZN’s revenue increased 136.2% from 2017 to 2018 to $277.6 million and so, if they maintain their Revenue per Hour Streamed, revenues could turn out to be over $500 million.
The relevant TAM for DAZN is the value of worldwide broadcast media sports rights (not just streaming) which is widely reported to be about $50 billion per year. The SAM for DAZN is the value of worldwide broadcast media sports rights which can be delivered by streaming as a so called Over The Top (OTT) service. A recent report by Grabyo, “Global Video Trends Report 2019” found that 50% of global consumers pay for OTT streaming services and this percentage is increasing. A conservative estimate of the SAM for DAZN is about $25 billion per year. DAZN has only just begun to score, the value of its SOM is only 2% of its SAM. As a consequence, it is highly rated as a business with long term potential.
Become a leader
Many founders struggle to answer questions about their market. VC investors generally look for a SOM with a size greater than $500 million. Smaller markets cannot produce businesses with high enough potential to be highly valued. It’s not worth their time to work on smaller opportunities. For yourself as an entrepreneur, you have the same choice. How much impact do you want to make with your life? The larger your SOM, the greater influence you will have and the more you can change the world.
Focusing your offering on a subset of the TAM can increase your chances of leading the creation of a new market. Challenging your assumptions about the TAM and defining a SAM in a new way can help to find the innovation required to build a bigger business.
For example, in 2007, Apple announced that it was changing its name from Apple Computer to Apple Inc. That same year, it also announced something else: the iPhone, three products in one: a widescreen iPod with touch controls, a revolutionary mobile phone, and a breakthrough internet communications device. This device sold out in the US when it launched. But a year later they announced another revolution, the App Store. Suddenly, the iPhone was a games console, an image editor, a musical instrument and a torch to name a few.
They really defined the smartphone marketplace in which they could become a leader. A market they could control in the first few years, without running into too much competition. And they did.