A total addressable market, or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.
TAM, SAM, and SOM in a nutshell
When launching or running a business, at the question “who’s your target?” it often happens to hear answers like “everyone can use my product or service.”
This implies a complete misunderstanding of the market.
This can be not good for several reasons.
First, it might make it harder to prioritize and focus on a few key partners who might help the business snowball and scale.
For instance, when PayPal launched, as pointed out by Reed Hoffman in Blitzscaling the company had to shift its focus four times in a short period.
When they identified their power users on eBay, they focused on and prioritized that niche market.
Thus, PayPal first dominated that niche and then moved forward.
Second, if you need external resources, such as lending and financing, being able to present the total addressable market (TAM) is a crucial element to make the value proposition for those investing in your business compelling enough.
For that matter, a few crucial questions, such as who needs your service, how much can I charge for it, and what players are already in that market helps to find a few elements to compute the TAM.
To evaluate a business opportunity, you need to look into three metrics:
TAM or total addressable market
SAM or serviceable addressable market
SOM or serviceable obtainable market
Let’s start with a practical and straightforward example. Imagine the scenario you’re opening a barbershop in Rome.
Now your TAM might be any man in the world with a beard. However, of those, how many can you reach and service?
It would also be great to say that your total serviceable addressable market is those men’s beards.
However, this is not realistic.
Instead, to be realistic, you might start from the neighborhood where your barbershop will be located.
This means that in a population of a hypothetical thousand people in the neighborhood, only 50% are men, and of those men, only 50% have a beard.
This means your total serviceable market is now only two-hundred-fifty men (a thousand divided by two, twice).
Yet, you’re not the only barbershop in the neighborhood. It seems like another person had the same idea, and her barbershop serves already half of those men’s beards.
This means that your potential market share might be 50% of the serviceable market, or a hundred and twenty-five people. This is your SOM.
Although this is a simplified example, that is a good starting point to understand the difference between TAM, SAM, and SOM.
You don’t need to perform complicated analyses to start understanding those concepts.
All you need is to start thinking in realistic terms about who’s that you’re trying to serve!
Case study
Defining the total addressable market is important, especially for companies attracting investors.
In short, in many cases, investors don’t look for the company’s potential growth.
But rather to the company’s potential growth in a growing market and industry.
Thus, guessing the potential market size, especially in growing or rising industries, is critical for most investors.
For instance, this is how Pinterest defined its total addressable market in its S-1:
The global advertising market is projected to grow to $826 billion in 2022 from $693 billion in 2018, representing a 5% compound annual growth rate (“CAGR”), according to IDC. The digital advertising market alone is projected to grow to $423 billion in 2022 from $272 billion in 2018, representing a 12% CAGR, according to IDC. In 2018, the consumer packaged goods (“CPG”) and retail industries accounted for $64 billion of this digital advertising spend, and the travel, technology (includes computing, consumer electronics and telecom), automotive, media & entertainment and financial services industries accounted for an additional $144 billion. The United States continues to represent the largest digital advertising market in the world. The U.S. digital advertising market is projected to grow to $166 billion in 2022 from $104 billion in 2018, representing a 12% CAGR, according to IDC.
Then the company defined its total addressable market and its market opportunity by highlighting the various advertising formats the company delivers (online brand advertising and performance-based advertising).
Your TAM is the BHAG
The notion of a big hairy audacious goal was first introduced by Jim Collins and Jerry Porras in their book Built to Last: Successful Habits of Visionary Companies. A big hairy audacious goal (BHAG) is a clear and compelling long-term goal guided by a company’s values and purpose.
No company will be able to reach its TAM in the short term.
And to be fair, no company should be trying to achieve that.
A company, if adequately reaching scale, ‘ll be able to get close to its TAM or even pass it (there are many assumptions in computing the TAM which might be underestimating it).
For instance, as the story goes, recounted in the book Measure What Matters, author and venture capitalist John Doerr asked Brin and Page, “how big do you think this could be?”
He was referring to Google. This was the fall of 1999.
John Doerr had thought that if everything worked, Google would have reached a market cap of $1 billion.
Yet, when Larry Page responded, “ten billion dollars,” Doerr replied, “you mean a market cap, right?”
Larry Page replied, “no, I don’t mean market cap; I mean revenue.”
At the time, assuming that sort of revenue generation meant reaching the size of companies like Microsoft or IBM, who were the dominant players.
While Doerr was impressed, he was also skeptical about it.
Yet, Google (Alphabet) today is an over trillion-dollar company, with $257.6 billion in revenues!
So both Doerr and Page, two incredibly smart people, were completely off about the TAM.
What does that mean?
Computing TAM is a great exercise to improve your business acumen, but it’s just that, an exercise.
Thus, it’ll be extremely hard to know, over time, how big an industry might get, let alone be able to tackle it all with limited resources.
It’s not just about the product; it’s about the business model and whether that is able to sustain a product to reach its SAM.
So also here, before you can tackle the SAM, you want to start to creating options to scale.
How? From the SOM!
Your SOM is your niche
Any company with restrained resources, but in general, any startup trying to tackle a new market, should start with a niche, and better yet, a micro-niche.
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.
From there, you want to start tackling your minimum viable audience.
When you tackle a small niche, you enable valuable feedback loops while trying to answer simple questions about the market and from there, create options to scale!
A total addressable market or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.
In simple terms, market validation is the process of showing a concept to a prospective buyer and collecting feedback to determine whether it is worth persisting with. To that end, market validation requires the business to conduct multiple customer interviews before it has made a significant investment of time or money. A transitional business model is an example of market validation that helps the company secure the needed capital while having a market reality check. It helps shape the long-term vision and a scalable businessmodel.
Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.
In a tech-driven business world, companies can move toward market expansion by creating options to scale via niches. Thus leveraging transitional business models to scale further and take advantage of non-linear competition, where today’s niches become tomorrow’s legacy players.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable businessmodel. And as the product is offered at wider and wider market segments, it’s important to align product, businessmodel, and organizational design, to enable wider and wider scale.
Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the businessmodel. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable businessmodel.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
