How to Calculate the Market Opportunity for a Startup’s Success
Joy Fairbanks provides an article that offers guidance for founders and investors evaluating market opportunities.
There are three tiers of scale commonly used to calculate the market opportunity for a startup’s product or service offering: TAM, SAM, and SOM. These are acronyms for Total Addressable Market, Serviceable Available Market, and Serviceable Obtainable Market. The purpose of these market assessments is to determine not what is, but what could be.
Founders, you may be struggling with calculating and interpreting these familiar concentric circles. Let’s begin with the understanding investors would like to derive from them.
What investors seek. Investors are looking for your insight and applicability. What are the key trends to justify your estimates and action now? What type of a market are we talking about? What is the competitive landscape? Is this a billion dollar opportunity?
State your market type. Market type drives your TAM. There are three market types: existing, re-segmented, and new. Launching into an existing market involves luring customers from existing competitors with better features, service, or pricing. Re-segmenting a market entails luring customers from adjacent markets by satisfying unmet needs. Creating a new market requires educating a new class of customer on an innovative offering. The type of market affects the cost of market entry, the sales cycle length, the adoption rate, the time to profitability, and the cash you burn. Investors need to know this.
Estimate need. Size the opportunity fit. This differs from using existing data for current products and services in a general category. It requires honing in on the customer’s pain point your offering targets but may not entirely serve. Uber did not get a billion dollar valuation by presenting a TAM that was too large and unwieldy (the all-inclusive global transportation market) or one too narrow and short-sighted (the existing ride hailing market). The relevant TAM represents a specific need: people needing to get from point A to point B on demand (and locally) without driving themselves. (Yes, a separate TAM should be calculated for the need to move “stuff” from point A to point B locally for UberEats, etc.). Estimating market size by need is more conducive to assessing innovation potential and new customer segments than by predicting it on existing products and services.
Key points include:
- Calculate bottom-up vs. top-down
- Show your assumptions.
- TAM/SAM/SOM and LAM
Read the full article, TAM/SAM/SOM The Meaning Behind the Metrics, on FairbanksVentureAdvisors.com.