App Growth: Defining Addressable Market for Apps — TAM SAM SOM explanation

0:03Tell me about your thinking on TAM and how to calculate it and common mistakes on how people think about TAM. TAM is really important for a company like Surfline. When you think about the total addressable market, how many people are out there that might be willing to pay for your product? There aren't a hundred million surfers in the U.

0:20S. So we have a niche TAM and it's very important we understand what that addressable market is because it should influence our product strategy, our monetization strategy, all of those things. I'm sure the founders weren't thinking about TAM back then, right? They didn't have to pitch anybody. I mean, look, surf forecasting wasn't really a thing back in 1985.

0:36We kind of pioneered it. Yeah, I learned that recently that even like wave forecasting wasn't until recent times that they even could predict when there were going to be swells and things like that. Yeah, big shout out to Sean Collins for doing that back in the 80s. But today it's really important for us. And when we think about TAM, really what we're trying to calculate is

0:54what is the size of the opportunity? in the market. There's some great use cases for TAM, the big one being really like a sales tactic to be candid, right? From a TAM standpoint, you're going out to investors talking about how big the opportunity is telling a story there. The flaws come when you start trying to calculate the addressable audience from a modeling standpoint and what you should do strategically from product

1:15strategy and monetization strategy. So I'll give you an example. Let's say we're a Golf company and you go out to market and you say, okay, there's 50 million golfers in the U. S. That's our TAM. If you're launching a subscription product, you'll probably find pretty quickly after you launch the product that There's 50 million golfers out there,

1:31but there aren't 50 million golfers who play golf on a frequent basis. Maybe it's 20 million that actually play on a frequent basis, and so you're kind of omitting a key factor, which is commitment. You really have to move from a metric TAM to another metric that's used in the industry called the serviceable addressable market SAM.

1:49And that's the biggest. Issue that I see with most companies that are going out to market and putting together their commercial strategy is they'll use TAM and they'll model everything off of that and they'll say, okay, well, TAM's 100 million people and we're going to go and acquire like 5 percent and call it a day.

2:03And that's how they model things out. But in reality, when you start digging in, you find out that, hey, really our product. isn't something that's going to service all 100 million of these people. It's going to serve as some fraction because there are other variables that I've omitted. And so it's really important to figure out what the serviceable

2:20addressable market is. And there's a number of different variables that you should look at. One is commitment. It's very important, especially in a niche direct to consumer space. You want people who are committed because they are going to be paying a subscription. And that's often omitted in the modeling and the estimates that people put together.

2:34That's the biggest one to be candid that I see out. When people are calculating the metric. How do you think about the SAM? Because I sometimes feel like SAM is actually the true TAM. Like you said, like, TAM is like the TAM people dream. SAM is actually your TAM. But I think there's an argument, and maybe this goes into more long range modeling as opposed to short range modeling, but that your SAM should

2:54maybe evolve into eat more of that. It depends on what the limits to serviceability are, right? Like if it's commitment, golfers are not going to become twice as committed by 2028, right? Like I'm not going to read that in a gardener report or whatever, but they might become twice as open to using software or something like that. So how do you think about Sam evolution in regards to like serviceable

3:14versus addressable difference? I think it's all about timing, candidly. So you should always have Tam in the back of your mind because You know, as a product leader in the space, you're going to look out and say, if my product is going to continue to evolve, serviceable for me in the future is different than what it is today. And so it's always important to have that TAM number in the back of your head and figure out what the delta is between your TAM and your currently

3:34serviceable addressable market. So I like using the serviceable addressable market for a couple of reasons. And the reason it's important. More than anything is if you have a good idea of what's serviceable, it can really influence your commercial strategy. So another example, if your TAM is really small or your serviceable addressable market is really small, you might want to wait your investment in ARCU

3:55more than you do subscription growth. You might say, okay, really? We might reach saturation a little bit quicker than we originally thought we should focus on going ARPU or maybe the strategy is, Hey, we know that we're going to get pretty significant market share within this audience. We should look at adjacent audiences or new geographies.

4:11And this is an exercise that a lot of big companies do. And if you look at the growth of companies like Spotify, for example, the growth isn't coming predominantly from the U S anymore. It's they've realized, Hey, we're starting to saturate a little bit in the U S we're going to look at markets outside of the U S and start getting market share there.

4:27Same thing with a lot of the big S Pod companies. So it's really important that you have your finger on the heartbeat there of what is actually serviceable and addressable today, but not lose sight of what is possible in the future. You can, you use the word investment, but you end up putting effort into something that you can't change once you've hit the limits or at least like the reasonable limits of your channel or your market or whatever you're

4:46pulling into, it's just wasted money. You're absolutely right. But the exercise is really this, at least the way that I've found it to be most successful is you find some market research out there and it gives you a general sense of what the scale of the market is. And then if you have great analytics on your platform, you can learn enough

5:01about your consumers to figure out. What segmentation actually matters like what you or Sam should be because the market research that you find out there is like typically just going to be very high level and you're going to have to cut it down, but it's up to you to determine how to cut it down and what variables do you need to factor

5:16in are the geographical variables. Demographic variables is a commitment. So it's important that you kind of go from both angles is start with market research. Do some analysis of your consumer and then try to hone in on what a serviceable addressable market is and you can make it as complex or high level as you want. I mean, the moment you start factoring in competitors, it starts getting really complicated because you have to factor in that's kind of the next

5:38step down, which is serviceable. Obtainable market is what percentage of the market can you actually acquire compared to the other competitors in the market.