SAM/TAM, Market Life Cycles and “the Chasm”

Video Contents

• [0:07] Who defines markets
• [0:24] Market Life Cycles: The Relationship between TAM and SAM over time
• [1:33] Marketers can influence the growth of SAM
• [2:55] Different Customer Segments Enter at Different Market Life Cycle Stages
• [3:33] The “Chasm” between Early Markets and Mainstream Markets
• [8:03] Crossing the “chasm”

Transcript: SAM/TAM and Market Life Cycles

So TAM is the total market of all people that could be in the market. SAM is the people that are right now.

[0:07] Who defines markets?

Who defines the market? We’re making claims about what the market looks like. And using these factors to define our markets. It is a two-sided problem. We have both suppliers defining the markets and customers defining the markets based on their decision-making process.

As markets mature, these definitions converge.

[0:24] Market Life Cycles: The Relationship between TAM and SAM over time

The reason we have these two numbers, TAM and SAM, the difference between the current and the potential market is because these numbers change over time. Whenever we introduce something new, a new market, the number of people who join the market follows this kind of predictable S curve. That’s been proven across many, many, many markets, many industries. The shape of this curve can vary quite a bit, but conceptually valuable for us to understand how much potential is left or what’s the shape of this potential.

And so we have a metric that is closely tracked called the penetration rate, also called the market development index , there’s a bunch of different names for it, but basically it’s always SAM divided by TAM: the percentage of the people that could potentially be served that are currently being served, at any particular time.

So we see the curve from stats, this is a cumulative distribution function. This suggests that we have a normal distribution curve. Early in the marketplace we have few people joining and then a lot of people join and then we get some tapering off. And then eventually the last people join. So this is the general shape of a market.

[1:33] Marketers can influence the growth of SAM

SAM, it’s the subset of TAM that has interest, access and ability to pay. So all three of those have to be true to put them in the market. And what’s interesting about SAM relative to TAM is that we can influence SAM. It’s hard for us as marketers to influence TAM, the number of people that could potentially be served, but what we can do is change interest, access, and ability to pay by the actions that we take.

That’s one of the reasons that the market index is closely watched by market analysts like stock market analysts. Stock market analysts have different interests in markets that are really early stage, fast growing markets, maturing markets, and late stage markets. We think of them differently because their growth potential is different. . And the more that the companies that are pursuing those markets can make substantive changes in interest, access, and ability to pay by doing effective marketing: creating products that have good need, producing those products, distributing them widely, communicating them widely, and offering them at lower prices. These are all our marketing tactics, right? Product, price, place, promotion. The more that we can do that, the faster and the higher we might get people going up this curve.

[2:55] Different Customer Segments Enter at Different Market Life Cycle Stages

So TAM and SAM are related to where we are in the market life cycle. Having a claim about where you are in the market life cycle is an important element of your argument.

As the market shifts, we have different customers with different interests, access and ability to pay that, enter the market over time. And this is what creates these inflection points. This is why we have the curve that looks like this.

In early markets, core performance benefits matter and it’s a very focused strategy. In late markets mass dominates. So we have to shift our strategy as the market changes.

[3:33] The “Chasm” between Early Markets and Mainstream Markets

People that study technology markets and entrepreneurial markets, which is a great place to study markets, have identified that there is this fundamental difference between people who buy in early markets and people who buy in later markets. Companies tend to grow to a certain spot and then get stuck. And markets grow to a certain spot and then get stuck. They’ve termed that the chasm, it comes out of technology markets but we see it in lots of different markets.

It’s basically the idea that we have these time-based segments of customers. In any particular market, early customers in that market have fundamental differences from customers later in the market.

Here’s how B2B technology markets talk about it. They talk about early markets as being innovators and early adopters. You may have heard those terms cause they get thrown into the business lexicon, and then you have mainstream markets.

Early markets are made up of a lot of visionary people. People that are enthusiastic about technology, visionary about where it’s going to go, and are willing to put up with transactions costs, and less than perfect products, and less than perfect ecosystems surrounding the products. In order to get access to early things and the ability to get the tremendous gains that come from being the first to access early things. They’re willing to take the risk they won’t work to get the upside risk. That’s the difference between venture capitalists and investment banks, or your local retail bank.

Mainstream markets. These are pragmatists. These are the people that have to keep systems running. Transactions costs are really important in mainstream markets. I already have a solution to my problem. I’m not going to adopt until I have a complete way of solving all the aspects of my solution.

In fashion we see these same kind of curves. This is a chart from people that track fashion markets and you see the first curve starts. And if it never gets past the introduction phase, it’s a fad. But some make it through that phase and then they call this fashion. But then fashion has an element of uniqueness to it. So as soon as it starts to mature or go basic, then the fashion forward people say, you know what, I’m not going to do it. So it never really makes it into maturity.

Key thing to take away from this: early customers are different from mainstream customers, fashion-forward customers are different from basics, and innovators in business markets are different from pragmatists, the kind of people that have to keep the business running, and they often don’t relate to each other. There’s often tension between the two.

And that leads to this gap. In any particular market, the people that adopt products early are people who are comfortable with innovation or value innovation in that market. And the people that adopt later are more interested in adopting something that somebody else like them has already adopted. That’s that peer pressure factor that comes in later in the market… everybody else is doing it, so now it’s time for me to be doing it.

Every market has this. The gap between the two may be deep, may be shallow, every market has this fundamental shift between the early adopters who are comfortable with innovation, are valuing unique benefits and willing to live with transactions costs, versus later markets that are really focused on transactions costs and value being able to look at what other people have done as evidence. To learn from others is an important tool for people in later markets.

People often take the next leap and say, “Well, there are some people who are more innovators and some people who are less innovators.” That is often more stereotypical than true. All of us have some markets that we’re passionate about or that we are more interested in being innovative in, and some markets where we aren’t. We also go through different predictable points in our lives where our preferences get loosened because our circumstances change and things like that. So younger people who have not built so many habits, don’t have as high transactions costs concerns as people who have been using habits for a long time. Unlearning those habits involves more work, involves more effort, involves more transactions costs.

I just want to highlight that being an early market adopter, or a late market adopter is largely about the situation and somewhat about the person. More often than not it’s about the situation.

[8:03] Crossing the “chasm”

These are some factors that influence adoption. The reading that you had today, there was a section that I don’t think I assigned to you that breaks it out in terms of customer factors and product factors. Here’s a list. Of these, you can see that the ones in red are all things that we classify as pains or transactions costs. Reducing transactions costs is a huge factor in crossing that chasm, because it allows us to learn through imitation.

And the best strategy that people have found for doing that is going small.

Go small. Small enough that people see the commonalities between the people that are using and themselves. And perhaps the people talk. We’re going to harness the power of word of mouth, which tends to be fairly local. Even the age of social media, we trust what our friends say about a product or service more than what the internet says about a product or service. So the more that we can tap into communities, within a niche, the more that we can get initial traction. And then what we’re looking for is some themes across those niches that will allow us to kind of break out.