What does an investor expect to hear when you talk about “the market”? Is it a free market, geographically bounded, regulated, serviceable? What is TAM, SAM & SOM? What’s a route to market?
When I started my first business I had no idea what the market size was nor what the route to that market – fortunately I nailed it intuitively. However it is different when you are looking for money or expertise because no-one can read your mind. You have to express your knowledge clearly. When an investor looks at your business the size and route to market will be key metrics since they tell an investor what the business potential is and how much profit is likely to be possible on each sale. Let’s take a look at them:
This can be stated more accurately: “What is number of customers who have this problem and could use your product as a solution?” You’ve already defined your problem and solution so now we can get crunchy with some real numbers. Generally there are three numbers of interest: TAM, SAM and SOM. The Total Addressable Market (TAM) is the number of customers who can buy your product with no constraints (i.e. geography, money, supporting services, competitors, etc.). The Serviceable Market (SAM) is the market you can reach taking into account trade barriers, regulation, geography, ability to pay, etc. Finally the Share of Market (SOM) is the portion of the market you can obtain against your competitors.
Take the example of Uber. The simplified segmentation they could use for the problem they are solving (that is: is getting from A to B) may be:
TAM includes all forms of transport (including walking, train, taxi, air, ship, car, bus, etc.) – size 7 billion customers and thousands of journeys – that’s trillions of A to B events.
SAM could be defined as those forms of transport using hire cars (excluding motor-cycle, put-puts, buses, private car, etc.) where the distance is short (more than 500m but less than 30 km say) and customers have the money to spend on transport.
SOM is the sector where people hire cars to get themselves from A to B. This includes all car hire firms – that is traditional taxis (and may include car rental companies). How many journeys fit this category, what percentage do you expect to obtain, what is the average value? I don’t know but I bet Uber does!
An investor will be interested in the definitions and how you obtained the number for each of these. As you can see definition is critical for the numbers to make sense.
Route to Market
This can be stated more accurately: “How do you get your product/service from your company into the hands of a customer so that they pay for it?” Think of everything along the route from your company to the customer. Each point on the chain needs to manage their own business – they need to make a profit too. So your product needs to pay its fair share of sales force, credit, storage, cash flow costs, warranty management, etc. Your role is to prove to each step in the chain that they can make a profit by supplying your product. In practice this often means you have to create PULL from customers as well as PUSHing the suppliers at the start of the chain.
Take the example of providing new health device through a major chain. The route to market is from your company to the major chain, their distribution network to each store and then to customers. Your marketing will create a desire for customers to own the product so they will ask at stores for the product (PULLing the product along the chain) while you PUSH the product into the major chain (by demonstrating significant profit margins). In retail, expect the retailer to look for a 50% mark-up on your price. Of course you can use direct web-based orders to short-cut the process – different products/services have different solutions.
So one slide to demonstrate all this is required in your presentation… perhaps a diagram?