How to find your market size

while being a startup - which always make us feel like we play on the hard level

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TAM, SAM & SOM

First, let’s see what these mean anyway 🤨 ⬇

TAM = Total Available Market SAM = Serviseable Available Market SOM = Serviseable Obtainable Market

Approaches on how to calcualte:

What is a top-down approach? - this is when we rely on numbers independent on our startup.

Bottom-down approach, on the other hand is an approach that relies on numbers dependent on our startup.

How to calculate TAM

My suggestion is to look for market research which has already been consucted by a professional firm and take the number that they have calculated. There is no need for us to conduct this market research in most of the cases.

In any case, I like illustrating concepts with numbers so I am going to follow the example given here.

We are selling sports cars on the Internet. Our TAM is the total number of cars sold every year - e.g. 79 million.

TAM = 79 million cars

How to calculate SAM

Now that we have our TAM, we need to discard everything from it which we DO NOT sell - e.g. any other car in the selling sports cars on the Internet example.

We know that the percentage of sports cars from the total car market is 5%. Then the total number of sports cars we can sell in 1 year is 5% * 79 million , or 3.95 million. We also know that only 3% of all cars sold are sold online. So we can sell online 3% of 3.9 million sports cars, or 118 500 cars.

SAM = 118 500 cars

How to calculate SOM

via GIPHY

Wooooh, things change here now. Until now we have used the top-down approach, and now we shift to a ** bottom-up** one. Here is a definition of SOM which I love ⬇

(SOM) — the subset of SAM that you can convince investors will be your first year of income. This is the market share you will actually capture during the first year.

This means that the number we will give for SOM will be much smaller.

What investors might like to see is TAM in billions, SAM in millions and SOM in hundreds of thousands. We could not promise a SOM in hundreds of thousands, and instead calcualted ours to be in tens of thousands.

Back to our selling sports cars online business. We ahve 5 employees, which make 500 calls a day selling cars. We know that only 5% of the people we called will buy a car - or 25 cars sold a day. Each month has roughtly 0 work days - so we sell 20 * 25 = 500 cars a month. We multiply this by 12 (months) and we get our first-year SOM at 6000 cars sold.

Note: It is sometimes advised to calculate your SOM by saying that it is 1-5% of your SAM. If you can do better than this, do better! 💪

Be Bold

We can be first-time startup founder, or more experienced founders. Sometimes we are market creators - think of the two cliches: Airbnb (created the market of renting out your home) and Uber(created the market of renting out your car).

When you feel confident in your business and you know that this is going to work and make everyone a lot of money - be bold instead of being shy about it. I like this example of Carto’s deck which helped them raise $23M of funding ⬇

Intersection of 3 exploding markets

Carto go one step further and document their process in this blog post so I and you can read it, learn from their experience and do better in business. Thank you, Carto ♥.


Reading:

  1. How to estimate market size
  2. Forbes - How to effectively determine your market size
  3. Use bottom=up to calculate your SOM
  4. A strategy to calculate the market size: TAM, SAM, and SOM
  5. Alternatively, follow a bottom-up approach to calculating TAM