How to Portray Your Target Market to Investors

The acronyms ‘TAM’, ‘SAM’, and ‘SOM’ are often thrown around in investment conversations, but what do these terms mean, and what is the best way for businesses to present them?

TAM stands for Total Addressable Market - the maximum amount of revenue a company could generate in a specific market if 100% market share is achieved. It displays the overall market’s potential for growth.

While TAM calculations are somewhat subjective, investors require this measure to assess their potential return on investment and whether the market provides enough demand for ‘venture scale’ businesses. Companies should arrive at defensible TAM figures that display a clear understanding of one’s target market, backed up by relevant data and assumptions. Founders should avoid displaying a TAM that is too broad and unfocused, but it is important to target a market that provides ample opportunity for growth.

SAM and SOM are perhaps more accurate measures for individual company potential. The Serviceable Addressable Market narrows the market based on geography or specialisation. It values the level of demand that is reachable by a company.

While SAM is attainable in theory, most companies compete with others in the market and will not achieve a 100% SAM share. SOM, or Serviceable Obtainable Market, is the most realistic measure for the portion of the market a business can capture amongst its competitive landscape. SOM provides a stronger estimate for short-term growth, until a company can grow and acquire more market share in the long run.

It is necessary for companies and investors alike to understand these metrics and how they may impact future sales and therefore, investment returns. Well thought out TAM, SAM, and SOM computations allow for better informed business and investment decisions.