Market analysis
Now that you have an idea of the product you would like to develop, it is time to evaluate the market you would like to go after. Understanding the size of the market you are targeting is critical to the success of your company. So what should be the first steps to evaluate the market potential of your product or service? In this session, we will present you the TAM, SAM, SOM method as a tool to help you evaluate and analyze your market.
Step 1: Calculate your TAM
TAM or Total Available Market is the market demand for a product or service. It represents the total revenues of a product or service sold by all actors on the market worldwide for a planned period (a year, a quarter, or a month). In other words, it is the absolute maximum revenue opportunity for your product or service if you could capture 100% of the market share and zero competitors. It is not a realistic goal but it can help understand the potential scale of your business with the highest number of customers and the highest revenue.
You have different ways to calculate your TAM:
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Top-down approach: Method that involves getting information from publicly available market research, industry data, and studies. To calculate your TAM using the top-down approach, you will have to combine the annual revenue of all the players in the space. When a product market has been well researched, there is a high chance you can find information about it through different resources online.
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Bottom-up approach: Calculate the actual and projected pricing, along with the current and total projected use of your product or service. With the bottom-up approach, you will have to find the biggest number by multiplying the projected annual value of a customer by all the potential customers in your market.
Example: You sell medical software at 500 is called ACV - Annual Contract Value). This software has been built specifically for retirement homes so your only customers will be retirement homes. There are 75,000 retirement homes in the world so your TAM would be $37,500,000.
- Value theory approach: The value theory approach most often applies to highly innovative sectors with entirely new products or services. This theory is based on how much customers are willing to pay for your product or service in exchange for the projected value they will be getting out of it. The calculation is the same as the bottom-up approach, above, but rather than calculating the average sale price, you’re looking at what a comparable product sells for, and what premium your superior product could attract.
Example: If we keep our the medical software example above. If your software is the first of its kind to use data to monitor patient’s health conditions on an ongoing basis, you would want to integrate this premium feature in your pricing. This would represent the biggest expected revenue you would get from each customer for this unique product.
Step 2: Evaluate your SAM
SAM or Serviceable (or Served) Available Market is the segment of the TAM targeted by your product or service within your geographical, demographic and/or technological reach during the planned period.
Calculate your SAM: Calculating your SAM is the continuation of the bottom-up approach we talked about earlier. If we keep our retirement home software example, your product would be more suitable for German retirement homes. There are 1,200 retirement homes in Germany with a price of 600,000.
Step 3: Capture your SOM
SOM or Serviceable Obtainable Market is the market share you will obtain and therefore your smallest number. SOM describes the total sales volume of a particular product or service that can be sold by your company within the geographical area you are able to serve during the planned period. It is basically your realistic sales forecast and first year of income.
SOM calculation - If you already generate revenue:
To determine your SOM, you will have to analyze how much of the Serviceable Available Market (SAM) you can capture based on your current resources vs the ones of your competitors. The calculation for your SOM is (Last year’s market share) x (This year’s SAM).
SOM calculation - If you don’t generate revenue yet:
Do a top-down calculation = Comparable market share* x SAM = SOM. It is the % of SAM the business can realistically achieve in the first few years of operations. You will have to take into consideration the market share of your competitors, the value proposition of your offering as well as the performance of your product if you already have numbers.
*The comparable market share is the percentage of market share you think you could get in your targeted market. Example, 25% of the 1,200 retirement homes in Germany.
Through the TAM, SAM, and SOM methodology, you can get some very helpful data to segment and size the potential market. But no matter which approach you use to estimate your market size and potential, you should always validate and compare your results with other methods or perspectives to make sure it is as accurate as possible. Don’t hesitate to use multiple approaches to cross-check your results and see if they are reasonable and consistent. The more you compare and validate your TAM, SAM, and SOM estimates, the more confident you will be when presenting your results to partners, customers, and investors.
Suggested Prompts
How can understanding the differences between TAM, SAM, and SOM help startups prioritize their marketing and sales strategies?
In what ways might market dynamics or competitive actions influence the accuracy of your TAM, SAM, and SOM estimates?
What are some common pitfalls or biases to watch out for when using different approaches to calculate market size, and how can they be mitigated?
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Introduction and Onboarding
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Welcome to Startup 101 - Ideation module!
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What is Launch?
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Meet the Launch team
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Get connected to our network
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What to Expect
CHAPTER 1 : CUSTOMER DISCOVERY AND LEAN CANVAS
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Chapter 1: Customer Discovery and Lean Canvas
Defining Your Startup Idea
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Articulate your startup idea
Forming Your Core Team
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Team and background
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Do you need a cofounder?
Market and Competition
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Market analysis
Competitors analysis
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Build Your Lean Canvas
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Find Your Early Adopters
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User Interviews
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Defining Your Value Proposition
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Build your pitch deck
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Build your website
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CHAPTER 2: PRODUCT MARKET FIT & MARKET RESEARCH
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Finding Your Product Market Fit
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Market Research and Creating a Go-to-Market Strategy
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CHAPTER 3 : BUILD YOUR PRODUCT
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Building Your Minimum Viable Product (MVP) and Prototyping
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User Testing & Gathering Feedback
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Product Demo
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Revenue model
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Get your first customers & generate revenue
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CHAPTER 4: MARKETING, PR & BRAND IDENTITY
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Start building your brand
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Marketing & PR
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Social media footprint
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CHAPTER 5: FUNDRAISING & FINANCES
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Elevator pitch
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Develop your network
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Fundraising
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Accounting and Finances
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WRAP UP
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