15.390x Who is your customer?

Review Notes

Total Addressable Market (TAM)

March May 2014

15.390x Who is your customer?

15.390x Who is your customer?

TAM

The Big Picture:

Now that youve developed your End-User

Profile, you can determine quantitatively how

large your beachhead market is.

15.390x Who is your customer?

Calculating your TAM

15.390x Who is your customer?

The TAM Formula

15.390x Who is your customer?

Necessary Assumptions

You will have to make some assumptions about

how much the customer is willing to pay.

As much as possible, base the number on the

budgets of the potential customers you have

identified.

15.390x Who is your customer?

Bottom-Up Analysis is

the best way to calculate the number of end

users that fit your End User Profile.

Also known as counting noses because this

process is very specific.

15.390x Who is your customer?

Sources of information are

for example, customer lists and trade

associations.

They can help you identify how many customers

there are, as well as how many end users each

customer has.

15.390x Who is your customer?

Top-Down Analysis

Top-down analysis starts by using secondary

market research, such as market analysis

reports, to determine how many end users meet

different characteristics.

15.390x Who is your customer?

Top-Down Analysis should be

only complementary to your bottom-up

analysis.

Top-down analysis will often overestimate the

number of end-users and often focuses too

much on spreadsheets and not enough on

actual consumers.

15.390x Who is your customer?

What Should Your TAM Be?

Less than $5million/year too small $20million - $100million/year good

range

More than $1billion Red Flag!

15.390x Who is your customer?

If your market is smaller than $5M

it is likely that your new venture has not identified a big enough beachhead market yet.

In such a small market, it will likely be hard to get cash-flow positive and achieve critical mass

It is possible that an initial TAM of $5million/year could be a successful business if you can capture the market

quickly and convincingly, especially if the gross margins of

your product are very high

15.390x Who is your customer?

Cautionary Note!

Entrepreneurs often inflate the size of their market and their expected market share.

Usually the market will be smaller than you

think.

15.390x Who is your customer?

If your TAM is greater than $1 billion

It is likely that you havent refined and narrowed down your beachhead market

enough, or that the market will be highly

competitive.

15.390x Who is your customer?

Why Calculate the TAM?

- Determining the TAM is a critical part of creating a successful product or service. It gives you a clear

understanding of your market. Advisors and

investors will expect you to present a TAM figure

and explain your logic behind it.

15.390x Who is your customer?

Important note!

- Do not spend too much time calculating the TAM because there are other factors that influence your success as well, such as gross margin, speed, potential for dominant and sustainable market share, and strategic value

- You will revisit the TAM calculation and modify it to make it more credible in later steps