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Market sizing TAM SAM SOM Target Market

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Reza Hashemi
Reza Hashemi

Startups need a clear understanding of their market segment and show know about SAM, TAM abd SOM. As a Mentor in StartupWeekend and NEXT program, I have noticed that many entrepreneurs are not familiar with these terms. Here’s a quick explanation of what they mean, as an addition to this useful slides (Copyright notes inside) :TAM is Your Total Available or Addressable Market (everyone you wish to reach with your product) , SAM is Your Segmented Addressable Market or Served Available Market (the portion of TAM you will target), SOM is Your Share of the Market (the subset of your SAM that you will realistically reach – particularly in the first few years of your business), SOM is known as Target Market in Steve Blanc Startup Manual. Identifying your TAM, SAM and SOM requires some market research.

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Estimating Market Size Mike Panesis
Seminar Schedule §  Business Models •  Canvas, 1/16/13 •  Environment, 1/22/13 §  Marketing •  Sizing a Market, 1/29/13 •  Product & Promotion, 2/5/13 •  Pricing & MarketValidation, 2/6/13 §  Operations, 2/12/13 §  Finance •  Basics, 2/19/13 •  Planning, 2/20/13 •  Measurement, 2/26/13 §  Teams, 2/27/13 §  Technology, 3/5/13 §  Law •  Intellectual Property, 3/12/13 •  Company Formation, 3/13/13 §  Investors •  Financial, 4/2/13 •  Strategic, 4/9/13 •  Presentation, 4/16/13 2
Markets & Marketing Markets §  How big is the opportunity? Marketing §  Communicating yourValue Proposition §  3 P’s •  Product (or Pservice) •  Price •  Promotion 3
This is your Business Model Canvas… 4
…Business Model Canvases are CONNECTED 5
A Market is the mechanism by which a business delivers its value proposition. 6 There are at least two roles in a market: Buyer Seller
Most markets consist of chains of buyer and seller relationships. 7 Buyer Seller Buyer Seller Component Suppliers Contract Manufacturers Apple Mac Owner
Market Size §  Quantifies the financial potential of your business. §  Helps you refine Business Model Canvas hypotheses: •  Very small market size may not be worth pursuing. •  May be difficult to gain traction in a gigantic market. §  Two measurements: •  Money (usually USD) •  Units §  People §  Consumption (e.g. washloads, room nights, kilowatt hours, etc.) 8
Three Market Size Estimates §  Total Addressable Market (TAM): Value of all of the buyer/seller relationships participating in the market. §  Served Addressable Market (SAM):The part of the TAM for which your business model’s value proposition is strongest. §  Target Market: (Usually) demographic segment of the SAM with the most direct path to success. 9 SAM Target SAM TAM
Total Addressable Market (TAM) §  Quantifies the entire chain of buyer/seller relationships in your market. §  Only need to estimate the value of the relationships at point of consumption (incorporates the value of all relationships in the chain) §  Usually very broad. §  Easiest to estimate. §  Examples: •  Mobile apps •  Energy consumption •  Health & fitness 10
Served Addressable Market (SAM) §  A value proposition rarely applies to an entire TAM. §  Opportunity to sharpen your focus on a particular part of the market. §  If TAM and SAM aren’t that different, just estimate an addressable market. §  Examples: •  Mobile healthcare apps for seniors •  Self-generated renewable energy storage •  Health & fitness at work 11
Target Market §  Process not that different than for SAM. §  One more level of refinement. §  Often a demographic target. §  Examples: •  Mobile healthcare apps for seniors, targeting retirement homes and large gerontology practices. •  Self-generated renewable energy storage, targeting the oilfield services, food manufacturing and automotive industries. •  Health & fitness at work, targeting new male employees aged 25-40 in companies with annual sales of $500M or more. 12
TAM, SAM andTarget Markets? 13
TAM, SAM andTarget Markets? 14
TAM, SAM andTarget Markets? 15
TAM, SAM andTarget Markets? 16
Quantifying Market Size §  If you’re lucky: •  Find an industry or market study that fits your business model §  If you’re not: •  Build a market model §  Important to differentiate: •  Facts •  Assumptions •  Extrapolation Algorithms §  Run multiple scenarios §  Two time frames: •  Now •  In 5 years 17
Example 18 §  The internet revolution changed the travel industry forever. But it didn’t change the whole travel industry. §  The travel industry’s meetings & events segment is hampered by inefficient business processes and ineffective pricing models that do not leverage modern technology, especially for hotel accommodations. §  GroupRes is Software as a Service (SaaS) that makes it easy for event guests to reserve a hotel room, while increasing profit for event planners and hotels.
Example 19 $35 $26$6 $18 $28 Total  Addressable   Market  (TAM)  of   Accommodations   represent  the   largest  share  (31%)  of  T&E  Spending     for  U.S.  Meetings  ($113B  Total) Accommodations Food  &  Beverage Car  Rental Air  Travel Other $Billion Source:  PwC $29.7 $1.8 $3.5 Served  Addressable   Market  (SAM)  is   $5.3B,  or  15%  of  spending  on   commissions   and  fees.   Net  to  Hotel Technology  Fees Commissions
Example Year 1   Year 2   Year 3   Year 4   Year 5   Year 6   Market   >Meeting Growth Rate   0%   0%   0%   0%   0%   Meetings   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   Room Nights/Meeting   139   139   139   139   139   139   Room Nights   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   Room Nights/Reservation   2.5   2.5   2.5   2.5   2.5   2.5   Reservations   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   >Avg Price per Room Growth Rate   2%   2%   2%   2%   2%   Average Price per Room   140   143   146   149   152   155   Room Revenue   35,000,000,000   35,700,000,000   36,414,000,000   37,142,280,000   37,885,125,600   38,642,828,112   20
Data Sources Data Compendia Consultancies CIA World Factbook https://www.cia.gov/library/ publications/the-world-factbook Accenture http://www.accenture.com NationMaster http://www.nationmaster.com Booz Allen http://www.boozallen.com Wikipedia http://www.wikipedia.org Deloitte http://www.deloitte.com Government Forrester http://www.forrester.com Bureau of the Census http://www.census.gov IBM http://www.ibm.com Data.gov http://www.data.gov McKinsey http://www.mckinsey.com U.S. Energy Information Administration http://www.eia.gov PwC http://www.pwc.com Business Universities Barrons http://www.barrons.com Industry Groups The Economist http://www.economist.com And if all else fails… Wall Street Journal http://www.wsj.com 21
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Helpful Hints §  USA-only estimates OK (unless the foreign market is critical to success) §  Make citations clear §  Solid, well-reasoned market size estimate adds credibility to your investor pitch 23
Next Steps §  Financial projections §  Estimate market share §  Common fallacies: •  “Our SAM is 50 gazillion dollars, so if we achieve on one hundredth of one percent market share, we’re a billion dollar company.” •  “We target a $5 million niche and expect to capture 75% of the market.” §  Test against Business Model Canvas •  Adjust market size assumptions •  Re-visitValue Proposition, Customer Segments & Channels 24
Rules ofThumb §  Market size projections are usually large numbers. §  Shoot for 10-25% market share within 5 years. §  The smallest business that might attract outside investors should project $10 million in sales within 5 years (minimum $40 million SAM). 25
Assignment §  Research and estimate market size for your business. Estimate at least one of TAM, SAM and Target Market. §  Upload to http://nvc2013.istart.org by Feb 15: •  Business Model Canvas •  Business Model Environment •  Market Size Estimate 26

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Market sizing TAM SAM SOM Target Market

  • 2. Seminar Schedule §  Business Models •  Canvas, 1/16/13 •  Environment, 1/22/13 §  Marketing •  Sizing a Market, 1/29/13 •  Product & Promotion, 2/5/13 •  Pricing & MarketValidation, 2/6/13 §  Operations, 2/12/13 §  Finance •  Basics, 2/19/13 •  Planning, 2/20/13 •  Measurement, 2/26/13 §  Teams, 2/27/13 §  Technology, 3/5/13 §  Law •  Intellectual Property, 3/12/13 •  Company Formation, 3/13/13 §  Investors •  Financial, 4/2/13 •  Strategic, 4/9/13 •  Presentation, 4/16/13 2
  • 3. Markets & Marketing Markets §  How big is the opportunity? Marketing §  Communicating yourValue Proposition §  3 P’s •  Product (or Pservice) •  Price •  Promotion 3
  • 4. This is your Business Model Canvas… 4
  • 5. …Business Model Canvases are CONNECTED 5
  • 6. A Market is the mechanism by which a business delivers its value proposition. 6 There are at least two roles in a market: Buyer Seller
  • 7. Most markets consist of chains of buyer and seller relationships. 7 Buyer Seller Buyer Seller Component Suppliers Contract Manufacturers Apple Mac Owner
  • 8. Market Size §  Quantifies the financial potential of your business. §  Helps you refine Business Model Canvas hypotheses: •  Very small market size may not be worth pursuing. •  May be difficult to gain traction in a gigantic market. §  Two measurements: •  Money (usually USD) •  Units §  People §  Consumption (e.g. washloads, room nights, kilowatt hours, etc.) 8
  • 9. Three Market Size Estimates §  Total Addressable Market (TAM): Value of all of the buyer/seller relationships participating in the market. §  Served Addressable Market (SAM):The part of the TAM for which your business model’s value proposition is strongest. §  Target Market: (Usually) demographic segment of the SAM with the most direct path to success. 9 SAM Target SAM TAM
  • 10. Total Addressable Market (TAM) §  Quantifies the entire chain of buyer/seller relationships in your market. §  Only need to estimate the value of the relationships at point of consumption (incorporates the value of all relationships in the chain) §  Usually very broad. §  Easiest to estimate. §  Examples: •  Mobile apps •  Energy consumption •  Health & fitness 10
  • 11. Served Addressable Market (SAM) §  A value proposition rarely applies to an entire TAM. §  Opportunity to sharpen your focus on a particular part of the market. §  If TAM and SAM aren’t that different, just estimate an addressable market. §  Examples: •  Mobile healthcare apps for seniors •  Self-generated renewable energy storage •  Health & fitness at work 11
  • 12. Target Market §  Process not that different than for SAM. §  One more level of refinement. §  Often a demographic target. §  Examples: •  Mobile healthcare apps for seniors, targeting retirement homes and large gerontology practices. •  Self-generated renewable energy storage, targeting the oilfield services, food manufacturing and automotive industries. •  Health & fitness at work, targeting new male employees aged 25-40 in companies with annual sales of $500M or more. 12
  • 13. TAM, SAM andTarget Markets? 13
  • 14. TAM, SAM andTarget Markets? 14
  • 15. TAM, SAM andTarget Markets? 15
  • 16. TAM, SAM andTarget Markets? 16
  • 17. Quantifying Market Size §  If you’re lucky: •  Find an industry or market study that fits your business model §  If you’re not: •  Build a market model §  Important to differentiate: •  Facts •  Assumptions •  Extrapolation Algorithms §  Run multiple scenarios §  Two time frames: •  Now •  In 5 years 17
  • 18. Example 18 §  The internet revolution changed the travel industry forever. But it didn’t change the whole travel industry. §  The travel industry’s meetings & events segment is hampered by inefficient business processes and ineffective pricing models that do not leverage modern technology, especially for hotel accommodations. §  GroupRes is Software as a Service (SaaS) that makes it easy for event guests to reserve a hotel room, while increasing profit for event planners and hotels.
  • 19. Example 19 $35 $26$6 $18 $28 Total  Addressable   Market  (TAM)  of   Accommodations   represent  the   largest  share  (31%)  of  T&E  Spending     for  U.S.  Meetings  ($113B  Total) Accommodations Food  &  Beverage Car  Rental Air  Travel Other $Billion Source:  PwC $29.7 $1.8 $3.5 Served  Addressable   Market  (SAM)  is   $5.3B,  or  15%  of  spending  on   commissions   and  fees.   Net  to  Hotel Technology  Fees Commissions
  • 20. Example Year 1   Year 2   Year 3   Year 4   Year 5   Year 6   Market   >Meeting Growth Rate   0%   0%   0%   0%   0%   Meetings   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   1,800,000   Room Nights/Meeting   139   139   139   139   139   139   Room Nights   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   250,000,000   Room Nights/Reservation   2.5   2.5   2.5   2.5   2.5   2.5   Reservations   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   100,000,000   >Avg Price per Room Growth Rate   2%   2%   2%   2%   2%   Average Price per Room   140   143   146   149   152   155   Room Revenue   35,000,000,000   35,700,000,000   36,414,000,000   37,142,280,000   37,885,125,600   38,642,828,112   20
  • 21. Data Sources Data Compendia Consultancies CIA World Factbook https://www.cia.gov/library/ publications/the-world-factbook Accenture http://www.accenture.com NationMaster http://www.nationmaster.com Booz Allen http://www.boozallen.com Wikipedia http://www.wikipedia.org Deloitte http://www.deloitte.com Government Forrester http://www.forrester.com Bureau of the Census http://www.census.gov IBM http://www.ibm.com Data.gov http://www.data.gov McKinsey http://www.mckinsey.com U.S. Energy Information Administration http://www.eia.gov PwC http://www.pwc.com Business Universities Barrons http://www.barrons.com Industry Groups The Economist http://www.economist.com And if all else fails… Wall Street Journal http://www.wsj.com 21
  • 22. 22
  • 23. Helpful Hints §  USA-only estimates OK (unless the foreign market is critical to success) §  Make citations clear §  Solid, well-reasoned market size estimate adds credibility to your investor pitch 23
  • 24. Next Steps §  Financial projections §  Estimate market share §  Common fallacies: •  “Our SAM is 50 gazillion dollars, so if we achieve on one hundredth of one percent market share, we’re a billion dollar company.” •  “We target a $5 million niche and expect to capture 75% of the market.” §  Test against Business Model Canvas •  Adjust market size assumptions •  Re-visitValue Proposition, Customer Segments & Channels 24
  • 25. Rules ofThumb §  Market size projections are usually large numbers. §  Shoot for 10-25% market share within 5 years. §  The smallest business that might attract outside investors should project $10 million in sales within 5 years (minimum $40 million SAM). 25
  • 26. Assignment §  Research and estimate market size for your business. Estimate at least one of TAM, SAM and Target Market. §  Upload to http://nvc2013.istart.org by Feb 15: •  Business Model Canvas •  Business Model Environment •  Market Size Estimate 26