Fancy Acronyms for your Business Plan: TAM, SAM, and SOM

When you go out to get a loan, especially a bank loan, you’re going to have to put together a pretty lengthy, comprehensive, and (let’s face it) tedious business plan. There are four main parts to the plan, and the bulk of the material is made up of your written plan, your financial sheets, and your appendix materials.

The fourth part, your executive summary, will be a 3-5 page summary of everything else.

In this post, we’ll be looking at those enigmatic acronyms: TAM, SAM, and SOM, which are the backbone for the market analysis section of your written plan. We’ve helped a couple hundred float centers to develop their business plans, and we’ve found that this one area generates the most questions, and seems to generally be the most difficult to wrap your head around.

Context: The Market Analysis Section in General

The market analysis is made up almost entirely of data about your location and demographics. The information you’ll end up gathering for this section includes:

Overall size and statistics for your city and the surrounding area.
Demographic information for your target market.
The percentages of the population that are made up of your target market.
Your own capacity predictions.
List of other ‘competing’ wellness services in the area.
List of other ‘competing’ float services in the area.
Regulatory information from the Health Department.

TAM, SAM, & SOM

TAM – Total Available Market

This is the total possible demand for floating in your area. This number should be big, and will most likely be the population within about 15 miles of your location that can afford floating ($35,000-$45,000+ annual income).

EXAMPLE: in a city with 2 million people in the surrounding area, let’s say that 50% of them make above $35,000.

This would make your TAM 1 million people.

SAM – Segmented Addressable Market

The SAM requires the most research. Essentially, you’re narrowing down your total possible customers to a group that you’ll primarily be targeting. Are you going for wellness nuts, athletes, service people, aging hippies, all of the above, or something entirely different? Do your best to estimate what the size of THAT population is, who are also within 15 miles, and who also make the right income. This will give you your Segmented Addressable Market.

EXAMPLE: If 25% of the 1 million people in your TAM already engage in some form of wellness activity, that makes the SAM 250,000 people.

SOM – Share of Market

SOM is the size of the market that you can realistically serve.

In other words, your max capacity of floaters. Since you have some repeat customers, you can calculate your max floaters as a generous 70% of your yearly max capacity.

EXAMPLE: If you have 4 tanks running up to 8 floats a day each, that’s about 11,500 maximum yearly floats and 8,050 maximum yearly floaters, which makes your SOM 8,050.

This SOM is about 0.8% (8k/1M) of your TAM and about 3.2% of your SAM (8k/250k). These are good numbers, since you don’t need to convert a very large a percentage of your potential customers in order to be successful.

Your SOM should probably be no higher than 5-10% of your TAM, and a lower number looks better.

GRAIN OF SALT: Your percentages of SOM to your TAM & SAM will naturally be higher in areas with lower populations.

Gathering Data for Market Size and Demographics

Some of the information on your markets may be difficult to track down, especially for smaller towns or cities. Your local Chamber of Commerce is likely a great resource, and if there are any local Spa Associations or Wellness Associations, they’re likely to have some good information for you as well.

For some general information (such as regional population and population density), census data can be a good source as well.

In smaller areas, you may find that accurate information is even harder to find. In this case, we recommend calling some of the largest or most active massage or wellness centers in town to see if you can get their estimates on the size of the market in your area.

People looking at this plan will understand the impossibility of total accuracy with these numbers. Mainly, they want to see that your estimates make sense and that you’ve done your homework.

TAM, SAM, SOM and the SBA

Many aspiring float centers are looking for loans in order to start up. For the size of loans we’re looking at, banks are one of the primary candidates to actually get funding. Unfortunately, banks in this lending environment don’t like giving business loans without 3 years of business tax returns. Fortunately, the Small Business Association (SBA) will back loans on new businesses, making them more appealing to lenders.

This means that targeting your business plan toward SBA guidelines is important to bringing your float center dreams to life. Here’s a large quote from the SBA advice page on the Market Analysis section listing out what should be included:

Information About Your Target Market – Narrow your target market to a manageable size. Many businesses make the mistake of trying to appeal to too many target markets. Research and include the following information about your market:

Distinguishing characteristics – What are the critical needs of your potential customers? Are those needs being met? What are the demographics of the group and where are they located? Are there any seasonal or cyclical purchasing trends that may impact your business?

Size of the primary target market – In addition to the size of your market, what data can you include about the annual purchases your market makes in your industry? What is the forecasted market growth for this group? For more information, see our market research guide for tips and free government resources that can help you build a market profile.

How much market share can you gain? – What is the market share percentage and number of customers you expect to obtain in a defined geographic area? Explain the logic behind your calculation.

All of this should sound familiar, because what they’re asking here for (in slightly modified language) is the TAM, SAM, and SOM for your float center.