Is this a problem or an opportunity?
This insight is like a Hans Christian Anderson parable, but aimed at you and your
business… There are big fish and small fish, potential customers, all swimming in the sea that is your potential marketplace. You, the lonely fisherman, must weave a net to catch your fish. Should your net be large and bulky, requiring more effort and expense to weave? Or should it be small and delicate, to catch those fish that would otherwise fall through the net?
TAM, SAM & SOM?
The biggest mistake many corporate marketers, entrepreneurs and even investors make in the initial stages of planning – overstating the size of the (SOM) serviceable obtainable market. You probably know, and I’m just lecturing here, that this is the actual market you measure for your product or service, since it is limited to those who use or can use your offering and those you can reach. Those planners most often quote the size of the serviceable available market (SAM) which is so large as to be beyond reach but still in the general field of your offering. Some even quote the total available market (TAM) which includes market statistics for an entire niche – for products or services far removed from yours, but perhaps from the same customer base.
So, is your (SOM) serviceable obtainable market large enough?
The size of your market may well define the ultimate size of your dream – and the interests of potential investors if that is your aim. You can be the most successful coffee house owner in a city of ten thousand, or the founding CEO of the largest chain of coffee shops on the continent. Defining your market in a limiting way reduces the opportunity to exploit the larger potential that may be available to you.
If you attempt to create a manufacturing business where the serviceable obtainable market for your products is only $30 million, even success leading to a dominant share of the market would not allow your company to scale it to a size of great interest to investors.
This lesson is important.
Companies grow proportional to the size of their (SOM) market, and success cannot turn a limited market opportunity into a grand enterprise.
When we investors look at a business plan, we look immediately to see if there is research to support the claim of a large enough SOM market to expect the candidate company to grow into the size projected. And we look to see if the size projected is large enough to interest us as investors, since that is directly proportional to the ultimate value of the company in a liquidity event.
To the point of the headline, sometimes an entrepreneur claims that there is a large market, making that TAM error, and then attempts to make the case for growth into a grand scale company, by sharing only a relatively small portion of that market.
The role of competitors in analyzing your claim.
If the market claimed to be of a large size has no current, fast-growing competitors, we investors must guess at the accuracy of your claim – something very unscientific. But if there are entrants already scaling, often we then can focus upon your differences and advantages that you bring to the market, a much more comfortable piece of work for your investors.
The size of your dream must be scaled to fit into the size of your marketplace – your SOM. Be sure you can back up your claim with some form of research, then work to perfect the differentiation you offer against the competition.
How about if you have no competitors?
And if your market truly is large but of unknown size, and if there are no competitors growing in the market, you must work doubly hard to convince investors of your dream. Yet, there are wonderful cases where entrepreneurs created and grew vast enterprises in new markets which could not be measured when their journey began. Think of FedEx, AOL, Microsoft, Cisco Systems, Facebook, YouTube, UBER, AinB&B – and tens of other billion dollar or larger players in markets that did not exist or were in their infancy when those entrepreneurs cast their nets.