Having viewed several business plans over the years, a common (and very important) item missing from most plans is a breakdown of the company’s TAM, SAM, and SOM in the marketing section of their plan.
Wondering what these acronyms mean? You’re not alone—many entrepreneurs are not familiar with these terms.
Here’s a quick explanation of what they mean, followed by an example:
- TAM = Your Total Available or Addressable Market (everyone you wish to reach with your product)
- SAM = Your Segmented Addressable Market or Served Available Market (the portion of TAM you will target)
- SOM = Your Share of the Market (the subset of your SAM that you will realistically reach – particularly in the first few years of your business)
Identifying your TAM, SAM, and SOM requires some market research (levels of research vary depending on your product and market potential), but once you gather the research you’ll have a better of idea of the percentages that coincide with each area.
Hear more about market research and your target market with Peter and Jonathan on the twelfth episode of The Bcast, Bplan’s official podcast:
Click here to subscribe to The Bcast on iTunes »
An example of TAM, SAM, and SOM
You’re starting a concierge service in your city that focuses on doing tasks/running errands for busy people, and people who need additional assistance (elderly, handicapped, and so on).
Your TAM would be all busy people, elderly and handicapped people in your city. If your town has 150,000 people, you may find (through market research) that total possible demand for your business in your city is 15 percent (or 22,500 people). Note: If you have a competitor in your market, your TAM would be smaller since you will be sharing this market with another company.
Your SAM would be the portion of that 22,500 whom your current business model is targeting (this will be outlined in your business plan). For example, your business model is being set-up to service 7500 people/year. This means your SAM would be 33 percent of your TAM (or 5 percent of your total city’s population).
Your SOM would be the portion of your SAM that your business model can currently realistically serve. For example, you may only have 3 employees (yourself and two others), so realistically what percentage of SAM can you reach in the first two-to-three years? Let’s assume your company can effectively provide concierge services to 100 people/month or 1200 people/year. This means your SOM is about 16 percent of your SAM (or around 5 percent of your TAM, or a little under 1 percent of your total city’s population).
If you’re seeking funding, savvy investors will ask you for these items in your business plan, and they’ll want you to be able to back-up your numbers. This is why conducting some market research up front is important—and even advisable before you begin writing your business plan. It gives you the validation of your market potential.
Hopefully this clears up a bit of the market reach acronym soup!