To estimate the size of your beachhead market you must consider the various subsets of a market and research into each one to understand the dimension of each subset: the Total Addressable Market (TAM), the Serviceable Available Market (SAM) and the Serviceable Obtainable Market (SOM).
TAM, SAM, SOM
The Total Addressable Market (TAM)
The Total Addressable Market (TAM) is the total market demand for your product; i.e. the annual revenue, expressed in monetary units per year, how much your business would earn if you achieved 100% market share in this market. So, how is the math? Three simple steps!
Step 1: Use primary market research techniques to conduct a bottom-up analysis that allows you to “count the noses” of each end user that fits your End User Profile. To complement this, use secondary market research (i.e. industry reports, government census) to conduct a top-down analysis that confirms your findings.
1. Who are your main paying customers (list 10 in order of priority/greatness)?
2. In how many regions/segments do they operate? Which ones will you consider?
3. Are paying customers and end users the same customer? If not, how many end users can you identify per paying customer? What is the final estimate of the amount of end users per region/segment/total?
4. What is your business’ industry estimated annual growth rate?
Step 2: Determine how much revenue each end user is worth per year.
1. On average, how much money are customers spending today for a similar but inferior product than yours? It might be helpful to list the similar products and the average amount spent on each.
2. On average, how much money are customers spending today just to get the job done (not considering comparable products)? It might be helpful to describe how this job is done and the average amount spent on it.
3. What is the replacement cycle (in years) of each investment in (a) and (b)?
4. What is the annualized expenditure per end user that you would be replacing with your offer? For example, if customers spend €20,000 for a similar but inferior product that has a lifecycle of 5 years, the annualized expenditure per end user that you would be replacing with your offer is €20,000 / 5 years = €4,000.
Step 3: Multiply your final estimate of end users by the average annualized expenditure per end user to calculate your business’ TAM.
How big should the TAM be? Anything below €5 million per year indicates the possibility that your beachhead market is too small and it will be very difficult to get a positive cash flow. Anything above €1 billion per year is severely questionable. Generally, a TAM that is between €20 million per year to €100 million per year is a good target.
The Serviceable Available Market (SAM)
The Serviceable Available Market (SAM) is the part of the annual revenue, expressed in monetary units, of the above-calculated TAM that is within your geographical reach.
1. Decide on your geographical focus.
2. Recalculate steps 1 – 3, considering your geographical focus, to calculate your serviceable available market.
The Serviceable Obtainable Market (SOM)
The Serviceable Obtainable Market (SOM) is the percentage of the above-calculated SAM that you can immediately capture; i.e. your penetration rate in your chosen geographical focus.
Summary
Ultimately, the TAM sizes the overall pie that you could potentially obtain in the future; the SAM is the short-term reachable market, or the first slice of this pie; the SOM is your first bite, the beachhead market you will be starting with to strengthen your core and strategically position yourself for future markets.
-
Excited to translate your business idea into a scalable business model?
Simply sign up now to access our tutorials, videos and tools that guide you through the art of creating and testing winning business models.
All this, and a lot more – for free!
