You believe in the strengths of that idea which has been going around in your head since some month, maybe years.
Imagining it materializing is the dose of motivation you need when you decide to become an entrepreneur, to give life to that project that little by little has been taking shape in your mind.
It will become a topic of conversation with family, friends or co-workers and it will come the day to put it into action.
A solid basis for taking this step is to evaluate the size of the market you are dealing with, that is, the opportunity you will have in the short, medium and long term.
This is where the TAM, SAM and SOM model becomes the protagonist. A tool in which market research is paramount.
research is paramount. TAM, SAM and SOM, three approaches to estimate market size
TAM STANDS FOR TOTAL ADDRESSABLE MARKET.
The Stanford University Graduate School of Business explains that it «corresponds only to the type of customer that will be served by your product or service, not to some estimates of market size provided by a research enterprise».
The TAM allows us to make an overall estimate of the size of the market in reference to the product or service we are proposing.
When we talk about the term «global» we mean that the TAM is not the market you are initially targeting, the one you would reach in the short term.
What you can determine through this calculation is the potential of your business idea and that space that you could take advantage of in the future.
Nevertheless, in order to know the estimated size of the TAM market, it is necessary to have prior knowledge of information such as:
- Studies that indicate the volume of the existing market, with the specific characteristics of your project (Be specific).
- – Sum of turnover of your main competitors (global market figure) or,
- Estimates built from the bottom to the top, taking into account your potential buyers and the percentage of them that would seek to purchase your product in the coming years.
Let’s make this figure more tangible through a specific example:
Hypothetical situation: imagine that your business idea pretends to create a platform to teach Spanish as a foreign language courses on the Internet and with a target audience living in the United States.
Considering this scenario, the TAM would be divided as follows:
- 80 million students – global TAM, people learning a language as a foreign language in the world*.
•2 million people learning Spanish online and offline in the United States*.
IS IT CLEAR UP TO THIS POINT?
Before moving on to the calculation of the SAM, it is not superfluous to keep in mind an important aspect…
You may feel a bit overwhelmed when you get this figure (TAM), nevertheless be careful don’t fall into the mistake pointed out by Michael Seibel, CEO of the U.S. startup accelerator and Combinator, in an interview with Wired magazine:
«No one really assumes that their business idea is going to cover 100% of the market. To affirm that if you don’t reach that point, then you’ve failed is unrealistic».
Now, let’s go to SAM…
SAM, SERVICEABLE AVAILABLE MARKET (SERVICEABLE AVAILABLE MARKET)
Referring again to Stanford Business School, in the article Market Research: A primer for Entreprenuers they explain that this calculation «limits the size of the market to customers actually served».
Then, you should arrive at a figure that integrates the sales potential you have in your market and the conditions you have established for your business.
Returning to the previous example, the SAM would be the number of people who annually sing up into online language courses, specifically to learn Spanish, and who live in the United States.
Yes, in this case, not only is the size of the SAM market reduced by access to courses through digital platforms, but it must also be adapted taking into account the language in which it is taught and the geographic location of the consumer.
Let’s assume that 25% of your U.S. market learns languages through the internet, that would be (500 thousand people) Of those, 3% study Spanish as a second language in per year, you would then have 15,000 people as your SAM*.
That said, we come to SOM…
SOM: STANDS FOR SERVICEABLE OBTAINABLE MARKET.
This calculation leaves aside the size of the market with respect to external figures, it means that it takes as a reference the resources you have available for and your strategy to reach the projected market share in the short and medium term.
In the hypothetical case of the platform for online Spanish courses, you must consider the investment you will make in advertising and marketing tools (call center service, social medial, e-mail marketing, e-commerce), among others.
Thus, the execution of this analysis will help you to set realistic goals in deadlines that are possible, without falling into speculation.
Marketing achievements based on facts and real resources for the first phases of your project.
In this way, you would analyze your marketing strategy contemplating situations such as:
- You have three call center consultants who on average will call 30 people daily. That is, 90 calls per day with an effectiveness of 2% (18 customers per day – 360 monthly – 4,320 annually)*.
•With the digital advertising, e-mail marketing communication, e-commerce service and your social media strategy during the first six months you will obtain 5 thousand impressions, with an effectiveness of 1% (500 customers in the semester – 1,000 customers in the year)*.
After this exercise you will know that your SOM would reach 5,320 people in the year.
What is then the size of the market for your venture?
Applying the TAM, SAM and SOM model you will have this picture:
TAM: 2 million people learning Spanish online and offline in the US.
SAM: 15 thousand people who live in the United States and study Spanish through digital platforms.
SOM: 5,320 people who would become your customers after implementing the marketing strategy in the first year.
The key: information
In conclusion, this trail takes you from the list of your future plans, where that dream project was, to contemplate the potential of your business.
Surely it is already clear to you that the information with which you build this base is vital to begin your enterprise.
Remember that…
«To take effective action, entrepreneurs and marketers need intelligence, and intelligence starts with information. The Research provides insight that leads to better decision making.» B. Babin, W. Zikmund (2015). Exploring Marketing Research.
*The figures in the examples to illustrate this article are not real, they are a hypothetical resource used to give more clarity to the exposed topic.
Author: Journalist and Digital Consultant | comunicaciones@smartsi.info | S Agencia Digital
Contributed by: Juan David Pulido, Digital Project Leader | juan@smartsi.info
S Digital Agency
