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Review Notes
Total Addressable Market
(TAM)March May 2014
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TAM
The Big Picture:
Now that youve developed your End-User
Profile, you can determine quantitatively how
large your beachhead market is.
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Calculating your TAM
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The TAM Formula
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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.
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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.
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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.
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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.
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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.
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What Should Your TAM Be?
Less than $5million/year too small
$20million - $100million/year good
range
More than $1billion Red Flag
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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
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Cautionary Note!
Entrepreneurs often inflate the size of their
market and their expected market share.
Usually the market will be smaller than you
think.
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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.
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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.
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Important note!
- Do not spend too much time calculating theTAM 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