Putting Theory Into Practice Part 6: Scoping the Opportunity
So how big of an opportunity is there for our product idea? Are we talking about a nice niche market maybe in the order of $100M or are we talking about a mega market – i.e. great than $10 billion? Can we really forecast it? And why do we care at this early stage?
All good questions that we team Teknovantage (our fictitious business for our story) is pondering. It knows that management wants to pursue new business ideas that have a “substantial” upside potential, but the development team also knows it’s really hard to forecast what future sales will look like for a new-to-market product.
I have worked and coached a lot of start up businesses and always advise them to not get too detailed with the numbers (yes they do need to be credible ) but instead be able to defend their logic and reasoning of how they got to these numbers and what assumptions are being made that will be validated as the plan moves forward.
At this early stage of validating the business opportunity all we want to accomplish and get a sense of how big this opportunity could be (i.e. this a great opportunity waiting to be seized?) and do some simple sanity checks to make sure our logic has some level of credibility. There is absolutely no point in doing exhaustive number crunching and projections.
Some may argue to not even bother to forecast at this early stage but I believe this is wrong. We do want to create some level of expectation and define “what victory looks like” early on to better frame the journey ahead and allow us to compare this opportunity with other opportunities in our product development portfolio. Scoping the opportunity will also help define the initial business model architecture and identify the key assumptions that need to be aware of and manage moving forward.
PAM ,TAM, SAM, SOM– what the heck?
You may have come across these TLA’s (three letter acronyms before) but really aren’t sure what they mean and how they can help you frame the business opportunity. It may very well be that your company uses different terminology and TLA’s too.
Terminology does vary from company to company so make sure you clarify what these mean before you start and if there is no formal definition in your company – define them up front before presenting your analysis. If you don’t I can guarantee you will be spending lots of time trying explaining the concepts and probably end up getting things very confused.
I located a primer on the Internet that you can review here for more details on what PAM, TAM, SAM and SOM are and ideas on how to derive them: http://geekyfry.com/management/marketing/pam-tam-sam-som/. Here are my definitions of PAM, TAM, SAM and SOM:
PAM: Potential Available Market. Sometimes referred to the market universe – this can be quite large and not necessarily very informative because it can cut across many different product categories or “jobs-to-be-done.” We could say that for Teknovantage PAM could be equal to every possible object that could embed a location sensor – this would describe the market idea for the “internet of things.” Huge and why there is so much interest about this embryonic idea.
TAM: Total Addressable Market is Total units or dollars available for all potential customer companies for relevant categories of products/services and applications. Our hypothesis is that Teknovantage could use their wireless sensor technology to locate, track and manage tool inventory – so we might say that our TAM is based on worldwide market for hands tools.
Doing a Google search for “ worldwide market for hand tools” we would come up with information like this: “Global Hand Tools and Accessories Market to Reach US$19.4 Billion by 2015, According to New Report by Global Industry Analysts, Inc.”
There are a lot of tools out there! If our hypothesis is right that location-aware tools are desirable we have quite a large market to pursue. Note we could argue that this actual defines PAM. It all depends on how we define the universe and how we segment down from there. The point is to use these tools to scope what’s out there and give us some sanity check as we move forward.
SAM (Served Available Market) is 100% of the units/ dollars available from addressable customer for applications that a producer/manufacturer can serve. To get a sense of this number we could look at the existing companies that sell hand tools in the worldwide market and come up with a set of numbers. Note that companies who sell hand tools (i.e. Craftsman, Stanley, Rigid, Dewalt, etc.) could potential be OEM customers – and be a better definition of SAM especially if our business model is focused on OEM’s.
SOM (Serviceable & Obtainable Market) is the Share of Market and a subset of SAM to aim at and could be gained. This is what our business is capable of capturing –or will be capable of capturing. It depends on our ability to reach potential customers though marketing communication and sales channels.
This is the number we want to narrow down and use for our forecast. It is defined by who we believe are our job executors and our ability to reach these job executers. We hypothesized that our job executers are construction workers and field service people – we can narrow that down further but for now we can use this to scope the market.
Our SOM will still be quite large so we will want to continue to winnow it down by looking at specific niches using job-to-be-done market segmentation. Our goal is to find a niche we can dominate to prove the business model and then scale (think big start small). We also want to take into account that we have to develop a marketing and sales channel to reach the targets – we can model this using forecasting tools like ATAR(Awareness x Trial x Availability x Repeat Purchases).
We should also do some triangulation by looking at what the market size is for wireless sensors and location based tags and look at some product analogies (products that look similar that are currently being adopted by our target segments). This will provide additional scoping and sanity checks for us.
As you can see early adoption stage forecasting is more of an art than a science. We are doing are best guess to put a stake in the ground to frame the business opportunity and build a strategy around it. It is very assumption based and that’s the reality of early stages of innovation and why we need to test our assumptions early, often and cheaply.
There’s a whole lot more tools we can use to forecast the opportunity and in future blogs I hope to talk more about these. But for now this should give us an idea of what our SOM looks like so we go to our “final” tool to frame the business – the reverse P&L – to help identify what we know and don’t know and create a VoC project strategy to help us get some answers – I know it seems like a lot but up to know most of the work we have done hasn’t required a lot of resources.
On to the reverse P&L!