I must admit, it can be a bit frustrating to see large VC firms frequently pushing out the same graphics about the importance of TAM, SAM, and SOM.
This happens often at events too, where young VCs speak about these metrics as if they are offering a unique insight.
These metrics—TAM, SAM, and SOM—do have their place in strategic planning, but they are not the comprehensive indicators of success they are often made out to be.
Relying solely on them can oversimplify the complexities of market dynamics and business strategy and lead to rapid failure.
Understanding TAM, SAM, and SOM
TAM (Total Addressable Market): The total number of potential customers who could use your product globally.
SAM (Serviceable Available Market): The portion of the TAM that your service can realistically address.
SOM (Serviceable Obtainable Market): The segment of the SAM that you believe your product can capture.
These metrics provide a simplified view of potential market size and are particularly useful when combined with other analyses. However, while it’s tempting to fixate on these figures, they represent only one piece, and possibly a small piece of the puzzle.
The Limits of TAM, SAM, and SOM
As anyone with experience will tell you, it’s not just the size of your SOM that counts—it’s the motion of the ocean.
What do I mean by this?
I often see young entrepreneurs convinced they’re building the next unicorn simply because their product targets a large SOM.
However, while a large market can be attractive, success hinges on much more than market size. Your TAM, SAM, and SOM are truly relevant only if your product can acquire significant market share or, even better, disrupt an existing market.
How effectively you can navigate and compete in your market is arguably more important as long as the size of your market affords for some level of ongoing sustainability.
It’s important to recognise that a smaller SOM, coupled with a high-value product that retains customers, can be incredibly valuable.
There are many companies with smaller SOMs that dominate their sectors and are highly profitable businesses.
Rolls Royce, Patagonia, Lego, Harley Davidson, Go-Pro are a few successful companies with a strong value proposition in smaller market segments.
Beyond Market Size: Focusing on Competitive Advantage
While TAM, SAM, and SOM are useful considerations, it’s even more important to focus on how your product and company will attract, acquire, and maintain market share. You should also consider how your product could disrupt existing markets.
Ask yourself:
- What can you do to compel existing users to switch to your product?
- How can you create a new category of product, changing the game in your target market?
- How do you build a moat around your value proposition to make competition difficult?
Consider the example of ride-hailing apps before Uber. The market size wasn’t particularly large, but Uber changed the game in the taxi industry by offering a seamless way to hail a ride and providing real-time tracking to reduce anxiety about whether the ride would show up.
This kind of market disruption requires deep competitive analysis and a thorough understanding of your market landscape - the motion of the ocean.
The Importance of Market Dynamics and Future Trends
Just as important as understanding the current market landscape is anticipating future changes. Significant shifts in your target market can render a compelling value proposition obsolete overnight.
Therefore, accurate competitive analysis and a deep understanding of market dynamics are far more crucial than the sheer size of the market you are playing in. Big markets often shrink, you don’t see many VHS innovations these days, likewise small markets can grow quickly - look at how everyone quickly went nuts for Pokemon Go, which these days has died a death.
TAM, SAM, and SOM are valuable tools, but they should be part of a broader, more nuanced strategy.
So, the next time you see a post on LinkedIn emphasising the importance of these metrics, take it for what it is—an initial framework, not the full story.
Don’t be discouraged by targeting a smaller SOM if you’re convinced you can dominate and provide value with your specific product. If nothing else, it can provide you with a foothold in a market and a sustainable revenue engine to build upon.
