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The fallacy of TAM

Posted: 06.09.15

Give ’em what they want, and sleep better

The SAM, TAM, and PAM are not characters in a new situation comedy, although some of the uses of these terms can be pretty amusing. 

The PAM (Potential Available Market) is largely dependent on the marketer’s “view of the world.” The TAM (Total Available Market) is used to define the entire accessible market for a given product’s technology on which a company’s product is based. There may be any number of SAMs (Served Avail-able Markets), each representing a different technology, composing the TAM. Each company’s prod-uct’s technology is part of a specific SAM. There may be more than one company marketing a product with a similar technology within a SAM. Each company’s product is represented by an individual SOM (Share of Market). The SOM specific to an individual company represents that company’s products’ market share position. 

The basic tenets of the PAM/TAM/ SAM/SOM relationship are: 

  • The TAM is never greater than the PAM (TAM < PAM). 
  • The SAM is never greater than the TAM and may be equal to the TAM (SAM = or < TAM). 
  • The SOM is never greater than the SAM and may be equal to the SAM (SOM = or < SAM). 
  • The TAM never equals the PAM (TAM < PAM). 

The figure shows the relative relationship of these “M”-based acronyms. 

The most common usage by companies hoping to impress investors is the TAM. Companies talk about their potential for growth by citing the TAM of a market they participate in, or hope to participate in. But their TAM comments are too broad, too unspecific, and way, way too generous. 

The two TAMs that have been quoted the most lately are IoT and automotive. IoT is so vague as to be utterly useless in a TAM prediction. Automotive is a bit easier. A semiconductor company recently cited the automotive TAM for their device as being $2 billion. How did they arrive at that? Well, their device sells for $20, and they reckon 100 million cars are sold worldwide a year, so do the math, as they say. 

However, in this particular case, the device is used only in cars with top-of-the-line, in-dash navigation systems, and those types of automobiles represent about 10%, maybe 15%, of the worldwide market. And that market is actually shrinking as more people rely on their phones, which are updated more often and have more robust road and travel information. So that company’s TAM is more like $200 million and declining. But wait, it’s even worse. There are five other companies participating in that market, and the company in question has about 10% market share. There is little chance the company is going to displace the incumbents as they fight to gain market share from each other as the market declines. So realistically, that company’s TAM is maybe $40 million, assuming they could double their market share, and who does that? The PAM might be $2 billion, but the SOM is $20 million, and probably declining. 

An exercise in arcane acronym-speak? It sure is. But our ever clever, sophisticated investors, who drive the sleep habits of CEOs, like sound bites and quick, “crisp” answers—they’re very busy, y’know, and haven’t got time to, well, to do due diligence. “Give me your elevator pitch, I’m late for my manicure. $2 billion TAM? Great, that’s a buy recommendation if I ever heard one. Thanks.” And for one, maybe even two nights this month, the CEO will sleep a little better.