TAM, SAM & SOM - three acronyms that most founders have struggled with quantifying at some point during the process of building out their business case.
Simply put they stand for :
- TAM (Total Available or Addressable Market) - The total size of the market based on demand for a specific product or service.
- SAM (Serviceable Available Market) - The total size of the market that you can reach based on the way your business model is structured.
- SOM (Serviceable Obtainable Market or Share Of Market) - The total size of the market that you can serve with your specific offering using the channels you've defined and your current capacity.
These three magic numbers play a pivotal role in giving both you and your potential investors some visibility into how large your business could get.
Unless you've decided to offer a niche service there is a good chance both your TAM and SAM offer a large enough opportunity to make pursuing this line of business worthwhile.
If you haven't done this for your business as yet I suggest you remedy that sooner rather than later, its a critical part of understanding the market size and the opportunity and there are a number of resources available online to help you do just that.
The Fence:
Having built out your TAM & SAM at this point, you're confident the size of the market and the opportunity is large. Now begins the actual challenge of planning to reach that first group of customers (the SOM).
It is at this point that all the barriers to entry start to rear their ugly heads (The FENCE).
The fence in question is comprised of multiple layers, each with its own set of challenges and only when you circumvent them all do you reach the promised land of your customers.
Some examples of the different "Fences" you might encounter,
- Advertising & Marketing - Larger players have the ability to drown you out by just spending more aggressively.
- Capital Costs - Depending on the nature of the business you might have to invest significant amounts of money to provide a strong foundation - logistics/technology/ infrastructure/etc.
- Cost Advantages - Existing players might be able to offer the same product or service at a cheaper price because they are well funded or have spent years perfecting their sourcing prices.
- Customer Loyalty - In a space that already has established brands, breaking customer loyalty might be a challenge.
- Distribution - If your business or service requires working with other distributors to get your service or product out there is a good chance existing players have already incentivized them to protect their turf.
- Economies of Scale - If you're just starting out you might have to compete with players that already have a very large presence and have the ability to source products at great prices due to their large volumes.
- Regulatory Barriers - Depending on the industry you might have to jump through significant regulatory hurdles to be allowed to operate in the segment. There is a cost to this, both time and money.
- Intellectual Property - If your business depends on IP to stand out be prepared for legal slugging matches with larger firms at times if you step on their toes.
- Tariffs & Taxes - Depending on the country and nature of business there are instances where larger companies are incentivized by the government to set up shop, something that might not be afforded to a young start-up.
- Predatory pricing - To squeeze out new entrants the larger players can afford to drive down prices to make it untenable for a smaller company to run a business.
These are just some of the barriers to market entry and the relevance of each depends on the exact nature of your business. What's important to note is that you need to be aware of each of these barriers, what it means for your business and start planning a strategy to tackle them one by one.
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