On the Macro Market View

Ziya G. Boyacigiller

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

Macro Market View

TAM - SAM – SOM - TAD

Sizing the Market Potential

Before you do a lot of work on a business plan,

first, you should “stop and think”:

“Is it worth it?”

Sizing the Market Potential

You need to agree that there is nothing better you want to do with your time and money, that the size of the opportunity fits your expectations. (i.e. “opportunity cost”)

This leads you to estimate the market size.

What is Your Market?

• First, define who your target customer will be.

• Write down the key characteristics that will define your target customers. (If you do it right, you should be able to hand this list to someone else, and s/he should be able to find them successfully for you.)

• Your customer is the one who will “hire” your product/service to do a specific “job” for her/him.

What is TAM, SAM, SOM?

Scenario –

You market a widget for the cellphone camera market. Your widget is only used in phones that have cameras embedded in them.

* Taken from Internet and modified...

WTH is TAM, SAM, SOM? *

Scenario - You market a widget for the cellphone market.

TAM - Total Available Market

Who is your TAM in this scenario?

WTH is TAM, SAM, SOM? *

Scenario - You market a widget for the cellphone camera market. Your widget is only used in phones that have cameras embedded in them.

SAM - Served Available Market –

Who is your SAM in this scenario?

WTH is TAM, SAM, SOM? *

Scenario - You market a widget for the cellphone camera market. Your widget is only used in phones that have cameras embedded in them.

TAM - Total Available Market - In this example this would be the total cellphone market.

SAM - Served Available Market - This would be cellphones with cameras since your product is only used in them.

Obviously, TAM and SAM are a result of definition… But, what is the need driving businesses to define them?

How are we doing?

Widget 2004 2005 2006 2007

Unit Sales 100 125 180 220

AGR 25% 44% 22%

SOM (vs TAM)

15% 17% 23% 25%

TAM/SAM breakdown for cellphone cameras:

15%

7% 10%

23%39%

50%60%

Not good…

Widget 2004 2005 2006 2007

Unit Sales 100 125 180 220

AGR 25% 44% 22%

SOM (vs TAM)

15% 17% 23% 25%

SOM (vs SAM)

50% 45% 45% 44%

AGR (5%) 0% (1%)

SOM vs SAM & TAM

SOM - Share of Market - this is just the market share you have in your SAM, or in this case your total volume versus the total SAM volume.

As noted above, by comparing your SOM to both your SAM and your TAM, you can get a feel if you are really growing market share, or just increasing volume along with the total market growth.

One Word of Caution…

You can gather data in multiple forms:

• Units (Adet) : 5 each, 20 units, etc.

• Currency (Para) : $5, 20TL, etc.

• ASP (Average Selling Price) : Total Revenue : 2.5 TL/unit

Total Units

You need to look at all, to make a healthy assessment of your business trends…

ENTRY INTO AN EMERGING MARKET

TOP DOWN ESTIMATE

TAM 100 unitsSAM 20 %

100 x 20% = 20 unitsSOM Target 50% 20 x 50% = 10 units

(1st Year)BOTTOM UP ESTIMATE

CUST A 2 unitsCUST B 1 unitsCUST C 3 unitsCUST D 1 units….. ….. units

Total 10 units

Estimating TAM, SAM, SOM

1

2

Drivers for Growth• It is important to understand the underlying reasons for

growth (trends).– Ex: cell phones telecom deregulation– Ex: Instant messaging real time, low cost communication

• These should be taken to the limit they will reach in the future to explain the economic tradeoffs behind the buying decision when compared to substitute products.– Ex: Will Internet access over satellite or cable win over time?

• Only then, can you be sure that the market will exist (not disappear) when you are ready with your product/service.– Ex: networking / dark fiber capacity

• You should also estimate the TAM and SAM growth rates over time, when estimating your market size.

Total Addressable MarketPaul Wiefels – The Chasm Companion

Question:

You are starting a web based business.

Your target customers are pet owners.

In USA there is $32B a year revenue in pet business -by 58 million Americans, 212 million pets.

What would you forecast your 1st and 5th year sales to be?

Available AddressableTotal Available Pet Owners in USA… 100% $32.0 B/year(*)

….with PC (% of PC/population USA) X 36% 11.5

… and with home PC X 50 % 5.8

… and with Internet X 70% 4.1

… and surfing www X 10% $400 M/year

… and over 18 years of age X 60% 200

… and with broadband X 43% 100

… and will shop on www X 20%? 20

… and will shop for pet on www X 10%? 2

… and will be repeat customers X 50%? 1

… and will be site loyal X 50%? $500 K/year

… and reachable within first year X 50%? $250 K/year (+)

Total Addressable … and will try your service/products X 25%? 62

(*) Spending for 58 million Americans – 60% of households – own 212 million pets

(+) About 110 people, based on numbers shown on this slide. (?) Estimated

For Online Pet Stores, It's Dog-Eat-DogSlim margins and a crowded market

point to a brutal shakeout http://www.businessweek.com/index.html

“…But Fido should have chewed up a few of these online pet store business plans. Because so many pet stores are rushing to the Web, the market is almost certainly headed for a messy shakeout. Pet supplies have never been a lucrative business. Operating margins are a razor-thin 2% at leading retailer PETsMART and 4.5% at rival Petco. And the prospect of competitors willing to lose millions to grab market share has investors skittish. “

Example from Turkey

Kodalfa – Green House Condition Monitoring System

TAM, SAM, TAD, SOM

TAMworld-wide, vehicle market

SAMTurkey, sport utilityvehicle market

TAD

25% SOM

TAD = SAM X 20% “A class” people X 67% Car owner X 80% Non-commercial use X 30% Reads magazines = SAM X 0.032 %

Total Addressable Market (TAD) isthe portion of the SAM that yourproduct/service can address. Start with thedefinition (key characteristics - so you can sorta mailing list using these characteristics todevelop an address list) of your targetcustomers and estimate the portion (percent)of such customers in the SAM. These keycharacteristics are like a filter that will letthrough only those who are qualified tobe your customers.

SOMShare of Market (SOM) commonlyknown as “market-share” is theportion of TAD you will own. Thisis meaningful when a time isspecified together with the percentagesuch as 25% within 1st year…

SAMServed Available Market isthe portion (segment) ofTAM that you decide to sell into,at least initially. You do so,because you do not havesufficient resources to sellinto TAM, or your productfits this segment only.

TAMTotal Available Market isthe complete universe ofall customers. This is themarket you can grow intoin time.

Note that SAM can be the same as TAD if you can reach (i.e. your “filter” addresses) everyone in SAM

Now You Can Ask Yourself:

Is It Worth It?