In the business market often refer to TAM, SAM, SOM, but the meaning of these acronyms and why they are useful to investors to evaluate an investment opportunity?
Contrary if you know what investor evaluate on first hand will help you to prepare yourself accordingly to attract them towards your business.
What is SAM TAM SOM?
TAM, SAM and SOM are acronyms representing different subsets of a market.
- TAM: total available market (Total Available Market in English) is the total market demand for a product or service.
- HECTOR market segment available (Serviceable Available Market in English) is the segment of TAM covered by your products and services being brought to your geographical.
- SOM: catchable market segment (Serviceable Obtainable Market) is the portion of SAM that you can conquer.
Still unclear on TAM SAM SOM? Let's take an example.
Suppose you ran a fast food chain. Your TAM is now the global market for fast food. Potentially, if you were present in all countries and did not have any competitor you'd accrue revenue TAM.
Unfortunately, this is not realistic ...
Suppose you launch your restaurant chain in 2 cities where the demand for fast food can be estimated using: statistical data on population and food habits, and observing the sales of fast food present in other cities with similar characteristics of your implant site.
This is your SAM demand your type of product to your port. In other words, if you were the only fast food in town accrue revenues from Sat.
But then, you're probably not the only fast food in town ...
So realistically you can expect to capture a part of your Sat. You probably will attract food lovers living fast or hard working near your restaurants and a fraction of people living a little further curious to discover a new restaurant. This is your SOM.
Ok, now let's look at why and when TAM, SAM, and SOM are important.
SAM TAM SOM, what's the point?
Put yourself in the shoes of an investor. You must generate a return on investment for your own investors, which involves both trying to quickly reduce the risk of each of your investments (ie determine the least amount of money if the start-up a market) and invest in opportunities with a major profit potential (ie a wholesale market).
SOM and SAM help the investor to reduce the risk of the investment, while TAM estimates the maximum profit potential.
SOM is the short-term goal of the company and therefore the largest of the three subsets: If you are unable to successfully take a fraction of the local market there is little chance that you managed to take a large share of the world market.
Investors, therefore, expect that you have a realistic goal in your business plan and will judge you on your ability to achieve this goal.
Realistically your SOM must consider:
- your product: Did you want to buy your products?
- your trading plan: you have a plan for you to reach a large portion of your target consumers?
- your SAM and the strength of your competition: there is little chance for you to take 50% market share in 6 months. Your SOM has to be a realistic goal given the size of your SAM and weight of existing companies in this market.
For the investor, your ability to achieve your SOM means that it will not lose its investment. In this context, SAM ensures that the probability that you reach your goal is realistic and quantify the potential short-term business.
If you reach SOM in time then you become credible to the investor, and you should then be able to increase your market share in your SAM and therefore generate a return on investment for the investor.
The TAM comes into play!
Once you demonstrate the viability of your business model (business model) and your ability to penetrate the local market, investors will begin to look at how this local success can be replicated globally. That is, within the TAM.
Let's illustrate this with a numerical example. You approach an investor with a target ROI of 10x and offer it to invest € 250k in exchange for 20% stake.
In your market research and your business plan you can reasonably estimate that:
- TAM = € 2bn (billion)
- SAM = 100 mm(million) €
- SOM = € 5 mm in 2 years and 12 mm € within 4 years
- EBITDA margin = 25%
- Recovery at the outlet = 8x EBE
What will happen if you succeed in reaching your plan?
When you reach your 5 € m EBITDA turnover of € 5m x 25% margin = € 1.25 m and the company is then 8 x 1.25 m € EBITDA = € 10 m. The return on investor's investment is then 10 m € x 20% equity / invested € 250 k = 8.0x.
When you reach 12 m € of turnover EBITDA was € 12 m x 25% = € 3 m and the company is then 8 x 3 m = € 24 m €. The return on investment of the investor is then € 24 m X 20% equity / 250 k € = 19.2x.
So when you reach your goal of SOM investors reached its target of a return on investment. Moreover, it is invested in a company that has achieved 12% market share (€ 12m turnover / SAM 100 m €) on a segment representing 5% of a TAM 2 billion € (SAM 100 m € / TAM 2 billion €).
Now if you decide to lie down nationally and internationally, the company potential sales (assuming that you can achieve a similar market share to large scale) 12% market share x € 2 billion TAM = 240 m €. Which will give an EBE 60 m € (25% margin) and recoverability € 60 m x 8 = 480 m €. The investor can, therefore, offer in year 4 to increase its investment to a total of € 48m while reaching its target of a return on investment of 10x.
As you can see SOM SAM TAM have different roles: SOM indicates a short-term sales target, SOM / SAM lens share of the short-term market, TAM and the potential large scale. Each subset of the market plays an important role when investors evaluate an investment opportunity and the goal is to get more realistic and accurate figures than seeking to have the largest digits possible.
Again remember:
I hope this article has helped you understand what these different acronyms. If you found useful: share, and if you have any questions leave us a comment below.
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