tam for cbd oil

TAM. What is it? Why does it matter? How is it calculated?

TAM, short of total addressable (or available) market, is the overall annual revenue opportunity that is available to a product or service if 100% market share is achieved. Further, TAM takes into consideration the products and customer segments that remain untapped. Take Uber, for example, some may see Uber’s service as just a replacement for a traditional taxi company. However, Uber now offers, in addition to ride hailing, scooters & food delivery. This changes (1) who your customers are and (2) the amount of customers you can serve.

Why is TAM important?

TAM’s important for various factors such as:

  1. Allowing start-ups and existing businesses to prioritize how much effort should be poured into specific products, customer segments, and business opportunities.
  2. Analyzing investments (modeling & valuation) to understand a company’s estimated and possible revenue growth (i.e. current and future market share).

Example: If a company has $100m in revenue and the TAM is only $150m, guidance of 50% revenue growth may not be realistic as it would assume 100% market share.

How’s TAM calculated?

There are various methods of calculating TAM. Below are descriptions of 3 of the main methods:

1) Top Down Approach – Follows a process of elimination that starts by taking a large population of a known size that comprises the target market and utilizes said population to obtain a refined market segment.

  • This method uses industry research and reports to attain the proper estimates of the population. Data providers such as OECD, UN, World Bank, Statista, and CIA World Factbook are useful resources for determining this.

Example: You want to enter the CBD business. Total estimated US TAM CBD oil is $1b. You then filter that down to your specific region & product which are Michigan and oils, respectively.

2) Bottom Up Approach – This is a more reliable method as it relies on primary market research to calculate the TAM estimates. This approach uses more data on the current usage and pricing of a product. An advantage of the bottoms up approach is that a company can explain why they chose a specific segment.

Example: You want to begin selling CBD in the US. You would begin by researching the current pricing & product demand for CBD oil sales in Michigan. Once that is done you extrapolate to derive US figures.

3) Value Theory – Relies mainly on estimates of what value the product will offer and how much of the value can be represented in pricing the product. This method is used when introducing a new product or cross-selling products to an existing customer base.

Example: You are selling oil but now want to venture into edibles and creams. You would use this to try and determine the value-add of the additional offerings.

Considering SAM & SOM

TAM, SAM, and SOM are not only catchy finance acronyms, but also various subsets of the market.

  • TAM (Total available market) – refers to total demand for a product or a service that is calculated in annual revenue.
  • SAM (Serviceable available market) – TAM that is served by a company’s products or services.

Example: CBD market $1b is the TAM. $200m of the market is related to oils.

  • SOM (Serviceable obtainable market) – This is the percentage of SAM that is realistically achieved.

Example: Using the SAM example above, $200m of the market is related to oils. However, that doesn’t mean you are going to up and control 100% of the market. There are other players/competitors. Maybe in your first year you only obtain 1% (or $2m).

Understanding TAM of a potential investment helps serve as a baseline for future growth and management’s expectations with respect to such growth.

CBD Market Could Reach $20 Billion By 2024, Says New Study

Affecting industries as diverse as cosmetics, food and beverage and pharmaceuticals, the exploding CBD (cannabidiol) market has generated considerable headlines, providing fodder to umpteenth analysis and forecasts. The latest one, by leading cannabis researchers BDS Analytics and Arcview Market Research, projects that the collective market for CBD sales in the U.S. will surpass $20 billion by 2024. Interestingly, this figure is a slight increase from than the recent forecast made by New York-based investment bank Cowen & Co, which estimated that the market could pull in $15 billion by 2025.

In this Aug. 31, 2018, file photo CBD buds of chocolate by Chronic Candy are displayed at the Big . [+] Industry Show at the Los Angeles Convention Center. The latest projection for this market, this time by top cannabis researchers BDS Analytics and Arcview Market Research, estimates CBD sales will beat $20 billion in the U.S. by 2024. (AP Photo/Richard Vogel, File)

The new forecast takes into account products sold through licensed dispensaries, pharmaceuticals and in general market retail, which includes cafes, smoke shops, grocery stores and pharmacies. However, BDS Analytics predicts that the majority of CBD product sales will soon occur in general retail stores instead of cannabis dispensaries. When you consider how cannabis has become increasingly integrated into mainstream society, as represented by the number of states that have legalized recreational or medical markets (33 and D.C for recreational use and 10 states plus D.C. for adult use), the BDS prognostication makes perfect sense.

But sales will continue from other distribution channels. In fact, BDS Analytics is predicting an compound annual growth rate of 49 percent by 2024 across all distribution channels. Also, they expect that the CBD market, combined with THC products, will create a total market of $45 billion for cannabinoids by 2024.

Other findings from the new study include:

Jessica Lukas, vice president of consumer insights at BDS Analytics, explained how the Boulder, Colorado-based firm cast this latest forecast. “We had to look at the landscape today, and then assess and predict where the market will go,” she said. “THC and CBD are very different with different functionality. Product forms that make sense and are very successful for THC do not necessarily transfer to CBD. Additionally, we had to strongly consider the interaction between the general market channels and the dispensary channel in assessing whether or not the availability of CBD products in the general market is incremental to purchases in dispensaries, will replace dispensary purchases, and/or will drive greater penetration and acceptance of legal cannabis.”