1. Step 4: Calculate TAM for Beachhead Market

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

3. 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

4. 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

5. “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

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

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

8. 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

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

10. 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

11. Top-down Analysis
September 18, 2018

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

13. 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

14. 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

15. 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

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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

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