Questions

Share of Market calculation. TAM, SAM and SOM?

I am trying to work out my TAM, SAM and SOM. I worked out that my TAM was $680m (Total Cloud Project Management Software Industry) and my SAM was $120m (Total Cloud Project Management Software used by software development teams) but I am struggling with working out my Share of Market. I know from research that a similar product to mine is making over $5m redbooth. I know that Axosoft a company that has the same target market i.e software development teams also is doing over $5m in revenue. I know Asana received $50m in funding earlier this year and another product Da Pulse received over $7m only recently and the cloud project management software revenue increased from $150m to $680 between 2010 and 2016 but I have no idea how I can work out my share of the market. Some of the examples out there that I read do not make sense. I am unclear if the SOM is based on where I am in 2,3,5 years or simply what % I can realistically achieve from the SAM. Ideally, I want to be at the same level as the likes of Asana or Redbooth with revenues of $5m but I want to be able to explain the logic of why I choose a SOM of $xm. Any pointers to help me be able to be confident in saying i think it will be $xm because of A,B, and C? Is there any ratio's rules or guidelines i.e if you say more than x% of the SAM it's not believable.

1answers

SOM refers to the portion of the market that your business COULD actually capture, as you stated: "[the] % [you] can realistically achieve from the SAM."

Let's use an analogy to break this down - and pretend you are talking about fishing instead of project management software.

TAM refers to all the fish (that manage projects) in the sea. SAM are all the fish (that manage projects) within casting range of the dock you fish from (ie your solution is viable for them). SOM are the number of fish (that manage projects) you can reasonably catch within the amounts of time, energy, and bait you can allocate to fishing.

The question within a question you ask about guidelines on believability is a great one. And, while I don't have a guideline or benchmark to share, I can confirm your instinct; ensuring that your projected SOM is reasonable is absolutely critical.

The best way to project this is by having at least some of the equation variables grounded in reality - ie, actually catching some fish. If you can show how much it costs to acquire a customer, how much it costs to service that customer, and how much you'll make from that customer over a lifetime, you've got some great empirical evidence to show how you'll achieve growth within your SOM.

I don't think of SOM as a target - it is rather the theoretical maximum number of customers or revenue I can achieve within the (sub)universe where my product or service adds value.

In the end - the number is important - but not as important as how you present it, and how you'll approach it with your product.

As an investor, you want to see more than just the answer - you want the thought process behind the answer. Was the founder thoughtful in their approach, did they look beyond the obvious while remaining pragmatic? Do they understand clearly why the SAM (macro-environment) and SOM (micro-environment) break out of the TAM in the proportions they've listed?

More than happy to dive deeper on this.


Answered 8 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2024 Startups.com LLC. All rights reserved.