TAM SAM SOM
I’m a big believer that the most important thing a new product developer – whether they are a startup or large well-established corporation – needs to articulate is that of “problem selection”. That is, what problem is your product going to solve?
It’s common sense but the lack of a suitable answer is an issue I see over and over again as an investor and mentor. This is especially true in academia and with many of the technology breakthroughs coming out of our universities and research institutions. New technologies come in the form of “better, faster or cheaper” but more often than not, they turn out to be a solution looking for a problem to solve.
Inevitably, some sort of problem can be identified but the corollary questions to ask is: is it worth solving? Is enough economic value created (in the form of revenue and profit) to compensate for the investment of limited time and resources and the inherent risks associated with new product development process? (The risks are high as research shows that the majority of new product development efforts fail).
Commonly, new product teams rely on an analysis of a product’s “Total Addressable Market” (or “TAM”). The TAM is the total available market, calculated in annual revenue, if 100% market penetration is achieved (i.e. no competition). This measure can be both useful and useless. If well-defined through a detailed geographic, customer or industry analysis, it can shed a light on a significant market opportunity. Unfortunately, many entrepreneurs are lazy and say something like “I only need 1% of this multi-billion market to be successful”. They think somehow this is sufficient to convince me of a product’s market potential.
What really needs to happen is a SAM and SOM analysis. “SAM” is Serviceable Available Market which is the portion of the TAM which can realistically be served by a company's products or services. I’m even more interested in a product’s “SOM” or Serviceable Obtainable Market which is the share of the SAM that can be realistically reached within a one to three-year period.
The SOM can then be broken down into much more definable components to identify where specific customers are located, what the Ideal Customer Profiles might be and how to get the product in front of them.
For example, an Edmonton-based startup in which I am an investor developed an after-market product that can be installed on industrial equipment to improve safety. The TAM analysis showed a market of over 7 million vehicles globally which made it interesting. However, when the company articulated the short-term SOM of the target customers in Western Canada by listing specific companies and number of units they each had in use, it gave me much greater confidence they could quickly pick-up local market share.
What they did next was layout a market blueprint of who they had to get in front of and how these customers made purchase decisions. This gave me a much better understanding of how they were going to utilize investor funds to bring the product to market.
If you are looking to make an investment into a startup or developing new products for your own company, ask the TAM SAM SOM questions.