If you’re a startup raising money, one of the most frustrating questions you will get asked by investors is ‘what is the size of your market?’
Now, if you prefer a Socrates approach, you can respond to a question with a question: ‘What is the size of your fund?’
It’s actually a legitimate question to ask, along with a bunch of other questions you absolutely should ask an investor.
However, it probably won’t achieve a whole lot (except for making you look like an asshole), and it’s a question you can’t avoid answering.
So it’s best you have an answer, miyagi-san.
What is TAM, SAM & SOM?
At Sellcrowd, we’ve worked out a really fast and simple way to calculate your TAM, SAM & SOM. It’s been extremely helpful for us to quickly assess the sales viability of companies we choose to work with. It works particularly well for B2B companies selling into mid market or larger companies, not so well for companies selling to SMBs or consumers.
First, we need to define what TAM, SAM & SOM means without boring you (skip this part if you already know).
- TAM – this is your Total Addressable Market and this means absolutely every single company you can sell your product to. And I mean everyone. Think global industry value as a good starting point.
- SAM – this is your Service Addressable Market which is the segment of your TAM that your business model can actually reach. If you’re a butcher based in New York, you can only sell to people in New York. If TAM is a global number for you, then you might make your SAM limited to the country you’re located in.
- SOM – this is the Service Obtainable Market and now we are getting real. This is the total number of customers you can legitimately win based on the amount of competition you have, your geographic location and other factors. You need to go super niche on this number and be very, very real about it.
There is plenty that’s open to interpretation here and plenty of differing opinions.
So it is good practice to show in your investor deck how you arrived at your addressable market calculations, and luckily, I’m here to help, with something I call LIAM – the Linked In Addressable Market calculation.
Calculating TAM with LIAM… the Linked In Addressable Market Calculation
If you’re a B2B company selling to mostly medium and larger size companies, there is a super easy way to calculate your TAM, using your good friend and mine, Linked In.
First of all, you need to identify your customer persona. Don’t worry about what they ate for lunch and that other customer mapping baloney. I simply mean job title.
For example, a client of ours sells almost exclusively to Facilities Managers. So, go ahead and type Facilities Manager into the search bar in Linked In, and provided you have a good profile with decent reach, you’ll see the total number of Facilities Managers on Linked In in the top left above the profile list.
For me, that number is 3,105,994, which is… a lot of people.
Now, what is your solution, service or product worth, on average?
Let’s say it’s $3,000 per annum.
Now multiply the two numbers.
Congratulations, you have a Total Addressable Market size of $9.3 billion.
How to Calculate SAM
So, we have a big fat TAM number for you that is going to tick boxes for some investors. Now let’s try to figure out a slightly smaller number, your SAM, or Service Addressable Market. According to Process St, it’s a good idea to limit your SAM to the geographical area you can access. So unless you have oodles of money or access to a global marketplace for hiring salespeople on a fractional basis, this is a good way to go about it.
So, let’s use our Facilities Manager example from previous, and let’s suggest you reside in the United States of America.
Linked In tells me there are 1,620,743 Facilities Managers in America.
Multiplying that with your average sale value of $3,000, and we learn your SAM is $4.86 billion.
How to Calculate SOM…
Okay, time to get serious. Your SOM is the number that really matters. Most investors really won’t care about the other two numbers (maybe the TAM number a little bit).
They will care about your SOM, however, and more importantly, they will care about how you calculated it.
The SOM is where you show that you really understand your niche, your target market, your business, your competition, and that you understand that numbers actually mean something.
The O in SOM is obtainable, so how much market share can you actually obtain, and in what timeframe.
So let’s go back to our trusty Facilities Manager example.
We know that you have 1.6 million prospects in America. Are you going to reach them all? No. You need to start small. You need to start with a specific niche. Then and only then can you expand.
So let’s zero in one more time geographically. Let’s narrow it down to city. Let’s choose Los Angeles. Using the previous calculation method, there are 62,830 facilities managers in LA.
Not so fast.
You’re still too broad, we need to carve it up further. Let’s think about specific industries you can target.
Why should you target an industry? Well, I would place a bet that a Facilities Manager that works for a tech company probably has some pretty different requirements to a Facilities Manager that works for, say, the Package & Freight Delivery industry.
Off the top of my head, I could imagine a Facilities Manager at a tech company is a little bit more progressive, and perhaps favours progressive features inside the products they use.
The Package and Freight Delivery industry is a bit lower margin, so perhaps a Facilities Manager there wants a solution that is a little more no frills.
I could be totally wrong, this is just an assumption. You’ll need to have one though, and then go and test that assumption by talking to prospects. Understand the market and that niche, solve the problems they face, and then and only then will you have a solution that is worth investing in.
Learn from my mistakes bro.
Investors will be a fat waste of your time until you do this.
So going back to our Facilities Manager solution selling company based in Los Angeles, we’re now going to target tech companies (‘internet’ and ‘computer software’ on the Linked In Industry list) only, because we assume they will like our fancy branding and clean UI, and some bells and whistles we offer.
So now, we are down to 1,183 companies. This is a critical number, and a critical list of prospects for you (you might call this the ‘SOM Prospect List’), but it’s still not your actual SOM.
You need to be realistic about how many of those companies you can actually win. For that, you need to be realistic about your resources, and your competition. Do you have competition? Do they have a better product than you? What percentage of those 1,183 companies are tied up in long term contracts, making them absolutely unwinnable for a year or two?
You should actually draw up a quadrant and work out how you stack up against the competition.
What do you know about them? Is the major player in the market really expensive? Do they have a bloated solution built on top of legacy tech that is really hard to use? Match yourself up against the competition in terms of price, features, simplicity/design and ease of adoption.
Hopefully your product matches up well, and you were smart enough to identify a segment of the market that is underserved.
Let’s suggest that you can obtain a whopping 7% of this market. And let’s stick an aggressive timeline of 12 months on that.
This means your Service Obtainable Market is just 82 companies or $248,430 USD of ARR in 12 months.
Sounds small, right?
It’s not a number that will get the blood pumping for most entrepreneurs (particularly once you start thinking about things like churn, *cough*, forget I said that), but it IS a number that an investor can actually wrap their head around.
More than that, it’s a palatably small number that is easily expandable into a bigger number, and if you can take things a step further and actually obtain some of that Service Obtainable Market, then you really have a business and you really have a shot with investors.
For example, if you’re able to say something like this to an investor, you’re in a really good spot:
“Our Service Obtainable Market is $248,000 which is 7% market share of the internet and software industry in the Greater Los Angeles area. It’s 82 companies total, and we’ve already closed 12 deals in 5 months, including x, y and z, which is $36,000 in ARR and 1% total market share in Los Angeles, and it’s 15% of the way to our SOM. We spent x dollars to get there so a Y investment will yield z return on investment”
That is an entrepreneur that understands their numbers and a path to market.
It becomes much easier for the investor at this point to picture your company acquiring a bigger share of the market. Not to mention 1% of that original TAM number is $93 million dollars – a healthy business!
In theory, all you need is a multiplication of the input factors (ie your CAC) to expand to new industries and geographies.
Now, if you really want to blow an investor away and show your complete dominance of the numbers, and if you’ve read this far, then I would highly recommend you read my follow on article, Exactly How to Canvas and Win a Service Obtainable Market (coming soon).