We Have to Talk About SAM

I was on a coaching call recently with a founder who told me her total addressable market (TAM) was $200 billion, her serviceable addressable market (SAM) was $50 billion, and that she “only” needed to capture 0.1% of that as her serviceable ownable market (SOM) and presto: she'd have a $50 million business.

If I had a nickel for every time I’ve heard a pitch like this, I’d have a SOM north of $50M.

But seriously, I’ve heard pitches like this over and over again, and while it’s clearly accepted (even encouraged) for startups to think about market size & segmentations in this way, I think that the approach gets something fundamentally wrong.

And I don’t mean that the numbers are wrong—they might be perfectly accurate. Rather, what I see as a fundamental error in the way this treats TAM/SAM/SOM is that it pushes founders toward exactly the wrong kind of strategic thinking.

So what perpetuates it, what’s the problem, and how can we do better?

The Seductive Appeal of Big Numbers

In my gut, I get why this framework is so appealing. You're sitting across from an investor, and you need to accomplish two things: you need to get him thinking that he can make a lot of money if it works (big TAM/SAM), and that it’s not such an unlikely thing that it’ll work after all (SOM as a tiny percentage).

You want them to think: "My gosh, this founder only needs to capture a tiny sliver of this massive market, I'm going to make a fortune."

The math feels so reasonable. It's just 0.1%! How hard could it be to get 0.1% of a market? That's like... practically nothing, right?

(In the same way, if I told you that you had a 0.1% chance of your office being swamped by rising sea levels, you’d likely move on without a second thought. We treat numbers close to zero as if they were zero.)

For investors, this framework gives them a way to quickly assess whether the opportunity is "big enough" to be worth their attention. They can look at that TAM number and immediately know whether this could potentially become a unicorn-scale outcome.

The whole thing feels scientific and rigorous. You've got your market sizing (which looks huge), your market share assumptions (which seem so small as not to raise any eyebrows), and your growth projections like like the requisite hockey stick. Perfect pitch deck, right?

The Strategic Problem Hidden in Plain Sight

The challenges start to become clearer when you consider what isn’t in the deck: other people. In particular, the competition and the customers.

If the market is really $200 billion and really attractive, it’s likely that there are a lot of people interested in capturing that “tiny 0.1%”, not to mention incumbents who own that market already. If you’re the only one going after a market (without incumbents), then 0.1% seems dead easy. But others are going after it also, and trying to pry it loose from the grasp of those who already have it. That’s a very different task. When everyone is fishing in the same big pond, you're competing on execution alone rather than unique positioning.

Beyond competitors both emergent and existing, the other “absent party” is the customers: which 0.1% of the customer base are you intending to serve, exactly? Within a market that size, there’s sure to be a lot of variety, both in terms of their exact needs and in terms of how to reach them with your better offer.

When your target market is "everyone who might possibly buy this type of thing," how do you decide which features to build? How do you craft a message that resonates? How do you figure out where to spend your marketing dollars?

You can't. Or, rather, you can, you will, and you must. It’s just that this line of thinking around TAM/SAM/SOM hasn’t given you any useful guidance in how to do it. It also hasn’t given your investors any true insight into how you plan to and whether you’re likely to be successful.

I watched this play out recently with a startup that’s aiming to break into the sustainable fashion world. The founder initially was aiming to serve “everyone who buys clothing sustainably,” but that made it really difficult to describe her customer’s typical decision-making around what to wear and what to buy so as to fit into their overall wardrobe. Through conversation, it became clear that her specific technology (which is very cool, by the way!!) actually yields designs that are a much better fit for a specific segment of sustainable dressers.

But that was nowhere in her pitch deck, and miles away from what she was saying about TAM/SAM/SOM.

In brief, this framework doesn’t help you in your quest to make and market a better product, and it doesn’t help investors to make a more informed decision about your chances of success.

What to Do Instead: Own Your Niche

Here's what I told that founder, and what I tell every founder who comes to me with this problem: big markets are great and you’ll definitely start by going after a small slice of it. But what actually gives you (and your investors) more valuable insight is that segment where you think you can achieve 60%–70% market share. Because any credible claim to be able to capture that share of a market means you really need to know your customers, their needs, how to serve them better than the alternatives, and how to get your offer in front of them effectively.

So why does this work better than the usual tactics? Three reasons.

1️⃣First, it's easier to design for a specific segment. When you know exactly who you're building for—not just “disenchanted Millennial, hates big companies, loves the Earth” but “this is Sarah, 26 and with high integrity, she loves vintage fashion and statement pieces, but hates that every sustainable garment is a white t-shirt shaped like a cardboard box”—you can build something that feels like it was made specifically for them. Because it was, of course.

2️⃣Second, it's easier to market to a specific segment. Instead of generic messages that might appeal to anyone, you can speak directly to their specific situation. You can show up where they already are, use language they already use, reference problems they definitely have.

3️⃣Third, when you get this specific about a segment, you’re more likely to avoid ending up in the same backyard as other entrepreneurs, and in a place where large incumbents are unlikely to be as aggressive in their counter-moves, because (so far as they now, if they pay attention to you at all, which would be a good sign) you’re only going after a tiny corner of their territory rather than going after the big pie, even if your expected slice is humbly thin.

"But Won't VCs Hate This?"

You might be digging in your heels at this point: “Brooke, this sounds great in theory, but VCs are going to hate it. They want to see those big TAM numbers and there’s no way they’re going to believe I can capture 70% of anything.” There’s merit to the point: some VCs may initially resist this approach. They’re accustomed to hearing about the tiny fraction of market share you intend to capture.

But recall here that your objective isn't to raise venture capital. Your objective is to build a successful business. And if you need VC money to do that (which you probably do) then watering down your strategy to appeal to more investors might seem like a good approach.

Notice that this is the same logic all over again: “If I appeal to a big enough group, I only need a tiny slice in order to get what I need.” And if the solution with customers is to delight and capture the few rather than breeze forgettably past the many, the same solution applies to investors.

You might be pleasantly surprised to find that a more targeted approach resonates really strongly with a small group of investors: namely, the ones that are the right ones for your business in particular, the ones whose dollar is worth more than any old dollar from some faceless investor.

How? Because the investors who know your niche well enough to seriously appraise your strategy and assess your chances of success: they can give you great direction. They can make the introductions that really matter, and because they’re so embedded, when they say "you should talk to so-and-so," that person actually takes the call.

"But What About Platform and Network Plays?"

You may be thinking: "Okay, Brooke, this might work for some businesses, but what about platform companies? What about companies focused on network effects? There are almost 3 billion Facebook users—that doesn’t sound like a ‘segmented niche’ to me.”

You’re right. Facebook isn’t working in a segmented niche.

Anymore.

When you look under the hood, you'll see that these companies started out incredibly niche and only broadened later.

• Facebook didn't launch as "the social platform for everyone to talk to their auntie, feed the political flame wars and sell their nightstand." It initially focused on Harvard students, then branched out to the Ivy League, then universities more broadly. And its functionalities were much more restrained.
• Amazon first sold books, and only became the everything store later.
• Uber started out focused on San Francisco, before branching out to other geographies.

This isn't an accident. It's actually a classic feature of network-effect businesses: there need to be people on the platform in order for it to be valuable to others. It’s a catch-22: you need value to attract people, and you need people to create value.

It's much easier to kickstart that cycle "somewhere" than to start it "everywhere." Why? Because it's much easier to say "the professional network for tech workers in the Valley to find jobs" (LinkedIn) than "the professional network for everyone globally to find jobs, share ideas and humble-brag about switching off during summer vacations." Reid Hoffman was successful in getting it off the ground in his initial segment because he knew their needs well (and had a large network of his own already, as a natural base for spreading the word initially).

The value proposition is clearer, the target audience is more obvious, and you can actually find them to tell them about it.

Once you've established that initial network in your niche, then you can branch out strategically to additional segments. But you start tight, not broad. Or, at least, that’s what the existing major players did. It’s up to you to decide whether you think there’s a better way.

Where Strategy Meets Culture

This is part of a broader point that I’ve been exploring for a while: our culture and our strategy have huge influences on one another.

This cultural approach to TAM/SAM/SOM has strategic implications because it conditions people to look at markets large enough to be worth taking a tiny slice of. That leads to very different strategies than looking for segments that have needs that are specific enough and underserved enough that we think we can actually capture a big chunk of the market.

When you start with "let's capture 1% of everyone," you're training yourself and your team to gravitate towards highly contested spaces and figure out a way not to get eaten alive. When you start with "let's capture 70% of this specific underserved segment," you're training yourself to think strategically about customer intimacy, differentiation, and avoiding the competition altogether.

Remember that founder I mentioned at the beginning? The one with the $200 billion TAM? With more clarity about exactly which segment she’s serving, she can make BOTH better decisions about running her business AND more compelling pitches to potential investors.

Smaller market (at first), bigger slice (that’s actually achievable). And the investors who get that will be much more valuable to her than those wowed by the massive TAM and lulled by the small market share needed for big returns.

So start small. Start specific. Find the clients you can truly delight with a compelling, tailored offer. And the investors too.