Step 4: Calculate TAM for Beachhead Market

Outline Overview Bottom-up Analysis Top-down Analysis “Show me the money” Workshop September 18, 2018

TAM – Total Addressable Market Overview Goal: use demographics from End User Profile to determine size of beachhead market TAM – Total Addressable Market Amount of annual revenue ($ per year) if you get 100% of market share September 18, 2018

Determine how many end users exists that fit End User Profile Overview How to ”calculate” TAM? Determine how many end users exists that fit End User Profile Determine revenue per end user per year Multiple two numbers => TAM September 18, 2018

“Sanity check” to determine if market is “big enough” Overview “Sanity check” to determine if market is “big enough” Get to critical mass Develop key capabilities Become cash-flow positive Most people overestimate TAM Goal: develop a conservative TAM number September 18, 2018

Two general approaches to estimating TAM: Overview Two general approaches to estimating TAM: Bottom-up Analysis Top-down Analysis September 18, 2018

Outline Overview Bottom-up Analysis Top-down Analysis “Show me the money” Workshop September 18, 2018

Start w/ secondary research Bottom-up Analysis Start w/ secondary research Determine how many end users fit End User Profile Aka “counting noses” Very specific Advanced topic! We’ll use a top-down approach… September 18, 2018

Outline Overview Bottom-up Analysis Top-down Analysis “Show me the money” Workshop September 18, 2018

Start w/ secondary market research Top-down Analysis Start w/ secondary market research Determine how many end users meet different characteristics Data expressed as inverted pyramid w/ several horizontal levels Bottom: smallest, contains all end users who meet End User Profile Becomes more general towards top September 18, 2018

Top-down Analysis September 18, 2018

Outline Overview Bottom-up Analysis Top-down Analysis “Show me the money” Workshop September 18, 2018

Count number of end users that fit End User Profile Show Me the Money! Count number of end users that fit End User Profile Determine how much annual revenue an individual end user is worth Multiply revenue per end user by number of end users => TAM September 18, 2018

You’ll have to make assumptions about: Show Me the Money! You’ll have to make assumptions about: How much customer is willing to pay per end user Be realistic! How much are they spending today to accomplish what product does? How much have they paid in the past for other products? How much value does your product create for them? September 18, 2018

Show Me the Money! End goal of estimating TAM: Get an idea of how big the market is. TAM is not precise! It’s an estimate. September 18, 2018

Outline Overview Bottom-up Analysis Top-down Analysis “Show me the money” Workshop September 18, 2018

Workshop What is TAM (again)? Estimate total revenue ($ / year) with 100% beachhead market share. September 18, 2018

What is the TAM for toothbrushes in the USA? Workshop Thought experiment: What is the TAM for toothbrushes in the USA? What assumptions did you make? September 18, 2018

What assumptions did you make? What are the biggest unknowns Workshop Thought experiment: What is the TAM for high-end electronic toothbrushes that cost $150 in USA? What assumptions did you make? What are the biggest unknowns September 18, 2018

estimate # of end users in beachhead market Workshop General process: estimate # of end users in beachhead market Based on End User Profile criteria (e.g., demographics, proxy products,..) determine revenue for each end user per year This is NOT product pricing (step 16) More like order of magnitude (e.g., $10, $100, $1000?) What is customer willing to pay? Multiply together => TAM September 18, 2018

Remember: TAM is NOT a precise number More like a general estimate Workshop Remember: TAM is NOT a precise number More like a general estimate September 18, 2018

Three ways to estimate annualized revenue per end user: Workshop Three ways to estimate annualized revenue per end user: What the customer currently spends Customer’s available budgets Comparables September 18, 2018

How much does each product cost? Workshop What the customer currently spends – customer is likely already spending money to solve the pain How much does each product cost? How many of each product does customer buy for end user? What’s the average product lifetime? E.g., $15K car per 5 years => $3000 annualized revenue September 18, 2018

Customer’s available budget Workshop Customer’s available budget How much is being spent overall to solve the problem you are looking to solve? How much money does the customer have? What fraction of this amount could be used to solve this problem? September 18, 2018

There will be NO exact comparable, since your product is NEW Workshop Comparables – Similar products or data points in different markets to help bolster TAM analysis There will be NO exact comparable, since your product is NEW But analysis i s useful E.g., product where revenue comes from advertising What is current ad rates for similar demographics of end users? September 18, 2018

Other things to consider for TAM: Profitability Time to conquer market Workshop Other things to consider for TAM: Profitability Time to conquer market Compound Annual Growth Rate Anticipated Market Share? September 18, 2018

Other things to consider for TAM: Workshop Other things to consider for TAM: Profitability – how profitable is revenue? How much overhead? E.g., Software? (99% profitable) Vs. Energy commodity? (10% profitable) September 18, 2018

Other things to consider for TAM: Workshop Other things to consider for TAM: Time to conquer market – how long will it take to succeed or fail in this market? E.g., Mobile app; deploy in 6 months Vs. Medical device; requires patent, FDA approval, etc. September 18, 2018

Other things to consider for TAM: Workshop Other things to consider for TAM: Compound Annual Growth Rate (CAGR) of Revenue Is this a market that is just starting up? OR- is this a mature market w/ users that have set habits? September 18, 2018

Other things to consider for TAM: Anticipated Market Share Workshop Other things to consider for TAM: Anticipated Market Share Winner-take-all Vs. Many players? September 18, 2018

Complete TAM worksheets w/in your group: Workshop Complete TAM worksheets w/in your group: September 18, 2018