What’s your TAM, SAM, SOM and LAM – What’s your Launch Addressable Market?
Is this market big enough to build a company around?
The effort of market sizing helps establish the potential market share your product could attain within the total market. Market sizing can be a difficult challenge for startup founders. They are looking to prove that they are going after a Multi-Billion dollar market for their products so this can lead to a bit of delusion on the market scoping exercise.
My goal here is to help you to avoid the 1% of China market – you know the person that has an awesome product and if they just sell it to 1% of the China consumer market they will make Billions! Of course the other example is that you just need one customer at $1B!
To help understand market sizing, let’s use a software example (vs. a restaurant of automotive). Let’s say you want to build a better Customer Relationship Management (CRM) product to compete with Salesforce.com. OK, I’m a Salesforce fan, but I’m happy to start with you on your hypothesis, Salesforce isn’t for every company.
Total Addressable (Available) Market – or TAM – is the entirety of the market for your product. Everyone worldwide that could buy your product.
So in the competitive scenario above, your Total Market would be any person that interacts with customers or potential customers – across all industries, geographies and sales models.
Service (Serviceable) Addressable Market – or SAM – is the market you can acquire with your product. An example of a limitation would be if your product is only in English, you would only be able to target a subset of the TAM that would be willing to buy your product in English. The next filter might be the vertical market that you are targeting, e.g. technology companies with sales teams vs. let’s say, drug companies with sales teams.
In the CRM market, your SAM would now be the people in sales and customer service worldwide who use English as their primary language for business.
Service Obtainable Market – or SOM – is the portion of the market that you can garner or get to use your product. What is the realistic market share that your company can garner at six months, 1, 2 and 3 years after launch.
This is where the analysis gets harder to calculate. It now has to do with the features you have at launch and the needs of your customers.
You can’t sell to everyone, who is the most realistic target customer?
In the example you’ve decided to target your CRM product at the technology sales market, you’ll need to narrow your market again:
- Small sales teams
- Medium sales teams
- Large sales teams
- Complex selling cycles
- Educational sales cycles
- Transactional sales cycles
The new concept I want to propose is Launch Addressable Market – or LAM. Today’s startup market is very familiar with the concept of Minimum Viable Product (MVP) and Lean Startup methodology talks about “getting out of the building” to validate you idea with real customers (technically prospects because they haven’t purchased anything yet). The concept of the LAM is where your market sizing exercise meets your MVP and product roadmap.
Get out of the building and go prove your launch customers enthusiastically wants your product. If that LAM customer falls into the “Meh” category, they are underwhelmed by your offering, you’re never going to get to your SAM market.
Remember there is a difference between your launch product/market and your scale product/market. If you don’t find customers for your launch, you’ll never get to scale!
You’ll need to convince investors that the market is both big and you can find the path to get to that market.