Should You Worry About TAM And SAM?
TAM is an acronym for total available market.
It means: How big is the total market? How big is the universe in which you’re gonna operate?
SAM means serviceable available market. This means the subset of TAM that you’re targeting.
SOM is the serviceable obtainable market sometimes referred to as ‘’target audience/market’’.
This is the size of SAM that you’ll try and capture and gives you a conservative and realistic estimate of the revenue for a product or service.
Say a Vietnamese restaurant opens in a big US city. The total market for restaurants in that city is $10 million a month (TAM). The estimated demand for Vietnamese food at 20% which equals $2,000,000 a month (SAM). There are five other Vietnamese restaurants in town, meaning that they each on average will have gross revenue of $400,000 a month. The restaurant thinks it can do better than average and set their serviceable obtainable market at $600,000 a month (SOM) this represents a 6% market share (of TAM).
Okay with that out of the way. I personally think you shouldn’t worry about any of this.
The current market size doesn’t tell you much. And perfect past market research doesn’t predict the future nearly as well as you think it does. (Which is why I’m not a fan of market research companies).
A story of Howard Schultz at Starbucks comes to mind when all market research companies warned them that hot Starbucks coffee in a warm Japan (Tokyo, in 1996. Their 1st international Starbucks) would be a total disaster. Howard went with his gut and it worked out. The Starbucks launch was a huge hit.
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A huge market might mean heavy competition. A tiny market might mean there’s little interest or it might blow up over the years. Who knows?
I personally think that if you’ll let yourself be held back by TAM, SAM, SOM.. you’re going about it the wrong way and probably aren’t that interested in what you’re doing anyway.
Think about Google. TAM, SAM, and SOM were pretty dismal and the general consensus was that there was no money to be made in search.
In fact, there were people who tried to get Yahoo to focus more on search, but Yahoo decided that instead of making their product better, they would turn into a media company and let search die off. Yahoo’s market capitalization was $125 billion in 2000. In mid-2017 it sold its core assets to Verizon for less than 5B and it’s (obv) no longer publicly traded.
‘’One of the weirdest things about Yahoo when I went to work there was the way they insisted on calling themselves a “media company.” If you walked around their offices, it seemed like a software company. The cubicles were full of programmers writing code, product managers thinking about feature lists and ship dates, support people (yes, there were actually support people) telling users to restart their browsers, and so on, just like a software company. So why did they call themselves a media company?
One reason was the way they made money: by selling ads. In 1995 it was hard to imagine a technology company making money that way. Technology companies made money by selling their software to users. Media companies sold ads. So they must be a media company.’’
A person driven mainly by profit (TAM, SAM, and SOM) would’ve been unable to stick it out and build a Google or an Uber.
I think there’s someone who needs to be thinking about this though, but it’s not you. It’s the people who’re gonna give you money in hopes of getting several orders of magnitude more in return.. Your investors and VCs.
IMO the founder should only worry about making something 1 person loves, then 10 then a 100 and so on.. and then and only then worry about scale.
Because at the end of the day if you enjoy what you’re doing then does it really matter if your company turns out to be a Billion dollar company or a ‘’mere’’ 5M dollar company?
Not to you probably, but only to your investors.