Market evaluation: TAM-SAM-SOM

Market evaluation: TAM-SAM-SOM

TAM-SAM-SOM itself is quite superficial. I'll show you how to use it 2 times for better efficiency – “bottom-up” and “top-down.” So you can increase the accuracy of the result.

What is market assessment?

A market assessment is when we try to figure out how much money is circulating in the area of our interest.

However, the market has no visible or invisible boundaries, which makes its assessment very abstract. Let’s say you want to paint fences. How do you know which services fall within the boundaries of the market “fence painting services” and which ones do not? If a specialist does not paint but draws graffiti, is that part of the market? And if the company does not paint, but advises on the choice of color range, is this service in line with the market?

The answer is in the eyes of the assessor. The market is subjective, and each startup assessing it has the right to view it from a convenient angle, defining and adjusting the boundaries depending on its goals.

This subjectivity should not embarrass the entrepreneur. Even this abstract knowledge of the amount of money in the sphere allows you to make business decisions whether to invest resources or not? Is it time to go to an investor or still early? Should we expand the team?

When to conduct an assessment?

In the early stages, assessments are usually carried out for two purposes:

  • To make sure that the project is worth investing in and effort, time, and money.
  • To convince the investor/angel/bank to give money, because money is only given to projects that are growing, transparent, and potentially large.

If you have no doubts about the commercial potential of the project and you do not need external money yet, then the evaluation can be postponed.

It is normal to make a mistake in the assessment!

It is not even accurate to use the word "mistake". It is better to say "valuation based on today's knowledge of the market".

If you are telling an investor about the size of the market, there is no need to feel like a schoolboy on an exam. The investor will not exclaim, "Aha, your solution is wrong!"

He may ask again about your valuation methods, but the rest of the data - the number of users, the boundaries of your niche, the specifics of consumption - is all your knowledge. But if you can't answer the question about the methods and inputs for the evaluation, it puts your competence into question.

If you are guided by adequate data and can count at a level of multiplication and division, then any valuation result is correct. This is the result that is available to you with your current knowledge of the market, and at the start, it has the right to be quite shallow.

As you dive deeper into the industry, the estimate will change.

So, the TAM-SAM-SOM method

First, let’s figure out how the method works and then look at a specific example.

TAM-SAM-SOM has usually illustrated as 3 circles - available, serviceable, and obtainable markets, each circle nested one inside another. I believe that this visualization of the method does not reflect the process of working with data.

The template in Miro:

The method consists of 4 steps.

1) The orange part

We formulate a niche. We identify the part of the large market that we will be researching. We do this by answering 4 questions in sequence:

  • What is the industry we work in (we want to have the broadest understanding of our field: producing software, assembling drones, or making apps for architects).
  • Who is our end-user (remember, that the "user" (the one who uses it) and the "consumer" (the one who pays) are not always the same person)
  • Where will we conduct our activities? (the more local the business, the more accurate the assessment; if the project is global, the assessment mistakes increase)
  • The final product (what exactly will our client get? Imagine that your business is a box with a gift for your user. He opens the lid, what is inside?)

All these questions help you look soberly at the object of the study: the market of our project. So that during the evaluation we are not distracted by other people's (interesting but irrelevant) niches.

2) The yellow part

Direct assessment, where we use two approaches - top-down and bottom-up, then compare results and correct inconsistencies.

3) The blue part

We decrypt what we have been able to assess at different levels.

4) The part with nested circles.

We fix the result, already fully aware of the origin of the data and its meaning.

What is "top-down" and "bottom-up"

When working 'top-down', we take open/known market data and then cut off those parts of the demand that are not relevant to our business.

And when we work 'bottom-up', we are only guided by our knowledge of the project: product cost, conversion rate, etc. The most rudimentary way is to multiply the approximate price of the product by the total number of potential buyers. If you have more than one estimated source of income, sum them up.

In total, each of the three TAM-SOM-SOM volumes should be counted twice - for a total of 6 data cubes. Guess which assessment will turn out to be the highest? "How many units of this product can you personally sell"? As a rule, the bottom-up is much more modest.

Once we have 6 estimates (2 TAM, 2 SAM, 2 SOM), we need to compare the results in pairs, find significant discrepancies, and try to explain them. Of course, there will be discrepancies because we are using different data in different methods or rely on someone else's opinion.

Data does not equal reality. It is just a rough idea of reality.

Online babysitting service

Team experience: own a marketing agency, attracting leads and clients

Product: The team plans to create a babysitting service online ("quarantine" business idea). The idea is that children already spend a lot of time on tablets, and such a service could make a child's time online more productive. The value for the client is to remove the feeling of guilt from parents for having their children so much on devices.

Content: games, reading books, role-play, quizzes, puzzles, and group activities.

1) Formulate the market.

The product - we create a service with video calls, children and their parents need it (children use it, parents pay for it), employ nannies and babysitters.

Competitive solutions - mobile edtech applications and entertaining internet content.

Target audience - parents of children 4-10 years old.

Geography - Russia and the Russian-speaking audience in the world. We take money for subscriptions or one-time classes.

Conclusion: we are studying the market for babysitters and nannies in Russia. Our niche (the part of the market that is the closest to our product) is online services.

2) Evaluation

From top to bottom

TAM. You can google in a minute that the market of babysitting services in Russia is 17 billion rubles a year. This is a number for the market as a whole, including nannies and babysitters, on and offline.

We assume that not everyone is ready to immerse themselves online, but only the most proactive part of our audience. Let's say 20%.

Total TAM= 17x0.2=3.4 billion rubles.

But 20% is a strong assumption. If it does not suit you, you can start by searching for information about the size of the market for children's apps in Russia - 45 billion rubles (J'son & Partners Consulting), and leave only the educational segment (according to “Tsifroprom“, the share of educational apps in the total global market is 5-7%, in Russia even less - 3-4%"). Total by this method: TAM=45x0.04=1.8 billion rubles

Note that despite the difference of almost 2 times, both TAM estimates are adequate.

SAM. Now we need to find the part of the market that can go into our pocket: we will not take money from nannies, but we will make a commission. We know that services where you can find babysitters - from specialized (KidsOut) to broad (YouDo) - charge a commission between 15 to 30% of the service. Take 25%, as we hope for a solvent audience of parents who are willing to pay for their time. Total SAM = 0.25x3.4 billion = 850 million rubles, the amount that babysitters’ services can earn on the commission.

SOM. Next, we need to figure out what part of this market we can take. This share may increase over time, but at first, it will be small. Google "babysitter online" - we see a list of competitors. We find about 20 active solutions, which means that we will be the 21st.

Dividing SAM by 21 companies on the market (yes, here we make another rough assumption of equal shares): we get SOM=40 million rubles. This is how much money can be made without driving out similar services. The amount is not much! But we believe that due to the quarantine and changes in user habits (online entertainment for children is no longer about "lazy parents", it is the new norm now, and the only question is the quality of the content), there is the potential growth of the niche and reasonable demand.


Now let's go not from market data, but from our knowledge of the value and behavior of buyers.

TAM. In Russia, there are 17 million children of target age (“Rosstat“). We take out families below the poverty line and villages - we are left with 9.6 million potential users. That's everyone who could potentially use our solution.

Average check size = 500 rubles/class (quick search for babysitting services on YouDo). Commission of 25% = 125 rubles/class- our share + customer return 2.5 times (asked nannies who work in KidsOut, rounded up), then TAM = 125 rubles x 9.6 million people x 2.5 times = 3 billion rubles.

SAM. We search for the part from the whole market that is relevant to our business model and idea, namely that we want to make a mobile app. 64% of children aged 3 and over are mobile app users.

Let's assume that our solution is made for conscious parents who are interested in having their child engage in extra educational activities. We find the statistics - 68% of parents report that their children attend activities other than school or kindergarten. Total SAM = 3 billion x 0.64 x 0.68 = 1.3 billion

SOM. The average price for babysitting online is 500 rubles. Our commission is 125 rubles. We can use our existing user base (50 000 people) and in parallel attract 10 thousand users per month (we know from our experience in a marketing agency that it is possible). Recall our information from the nannies about the return rate of 2.5 times. SOM = (50,000 people base + (10,000 people x 12 months)) x 125 rubles x 2.5 times = 53 million rubles/year.

3) What have we calculated now?

We calculated TAM SOM SOM in two ways - top-down and bottom-up. Plus, we took several different data inputs:

  • TAM is the total market for babysitting and nannies in Russia;
  • SAM is our market share, taking into account our business (developing a mobile app);
  • SOM is our available share, considering the commercial model and competition.

4) Results

TAM - 3.4 billion. Selected the highest value available because we believe in market growth.

SAM - 850 million. Selected the result with the fewest assumptions.

SOM - 40 million. Selected the lowest result to stay sober and understand that the potential of the project is kinda small.

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