understand and imagine The size of the market you target is critical to obtaining funding for your business. Investors and venture capitalists alike want to see a successful product or service that can scale and capture a significant portion of a larger market.
At any investment level, be it seed or Series B, be sure to include a slide in your presentation that explains your market size from three perspectives: TAM, SAM, and SOM.
When you provide your market size to investors, they are looking for information about TAM, SAM, and SOM. These data points hold the secret of numbers that may seem huge and unattainable, but if you systematically look at the size of the market, you will realize that it is actually not that difficult.
I recently attended a presentation by a company that produces innovative, nutrient-dense olives and peppers. Because their datapoint script is simple and straightforward, I will use it here to explain their TAM, SAM, and SOM.
Step 1: Capture THERE
While TAM (Total Available Markets) is the most troubling, it is the easiest to deal with. TAM describes the total turnover within a larger area. You can calculate TAM in three different ways.
first top-down approach Often obtained from publicly available market research reports or extracted from publicly available data reports.
next bottom up approachWhich is based on the calculation of actual and expected prices, as well as the current and total expected use of your products or services.
Doing your homework will take the guesswork out of your financial projections, show potential investors what value investing in your business will bring, and help you reach your goals.
is final value theory approachI This principle applies a reasonable analysis of the estimated cost and overall expected use of your product or service, and then calculates how much value can be reflected in the price. Value theory is usually applied to completely new products, services, and categories. Let’s apply this principle to Airbnb.
Airbnb has revolutionized the hospitality industry by inventing technology that allows homeowners to find travelers looking for accommodation. To apply the principle of value, you need to estimate how much a traveler is willing to pay for this new type of accommodation, how much a homeowner is willing to pay per night, and how much Airbnb is willing to use. can i get it from the landlord? Technology.
When a product or service category is already well researched, TAM is often calculated from publicly available market research reports. If a product or product category is new and under-researched—which is often the case in tech and also applies to other verticals—I recommend hiring an experienced market research consultant to help with the TAM data. value theory approach.