How to calculate Total Addressable Market (TAM) - Startups 101

this video was brought to you by us slight pain make beautiful slide presentations in no time get one free month by signing up at slab beam comm /youtube one of the most common questions we get is how to calculate a market size slide after so many years of this I believe I can come up with a decent market size estimation certainly much better than it used to but in order to explain this in the best possible way we've invited Steve Barse one of the managing partners at dream adventures and also an angel investor to tell us all about it hi let's start with some basic definitions so what's Tam or total addressable market what is it it's the total market demand meaning all revenue for a product or a service now sometimes people also talk about Sam which is the service addressable market which is the segment of the Tam targeted by your products or services within a certain area like a geographic region now I'm not a big fan of things like Sam and Psalm so in this episode we're just gonna focus on Tam we'll talk a little bit about how go to market strategy can impact Tam but we're gonna focus on Tam [Music] so what's the first big mistake that we see startup after startup make about tam and that is they take a top-down approach they say it's a huge market and if I just get 1% of the market its enormous and all right so to that is no absolutely not you cannot do a top-down estimate of Tam you're gonna have to go bottom-up you're gonna have to document your assumptions and show how your Tam comes together so little further what is Tam not these are some other big mistakes that we see startups make all the time your Tam is not the size of the problem so we see a lot with health tech companies we work with well if you look at the size of the opioid crisis the United States it's a hundred billion dollar a year problem that's the size of the problem not the Tam so another big problem that we see is people talk about Tam but they talk about the size of the entire market and you don't even exist yet so it's not the size of the entire market it's the size of your market so let's give some examples of that how big is the market when you're trying to calculate Tam so we see a lot of urban tech and prop tech companies and they'll say the cad and bim a market building information management it's a multi-billion dollar market right but your product doesn't even exist yet or they'll say the cybersecurity market is enormous if you look at the Tam it's a 250 billion dollar market that's billion with a B if we just get 1% of that will be a 2.5 billion dollar a year cyber security company yeah that's great but you can't do Tam top-down so let me give you some other examples of what we see people make mistakes like imagine you were making ski goggles and people say if you look at the size the total dress in the market of the US ski and snowboard industry its 3.3 billion dollars a year in 2020 you make a ski goggle that's not your total addressable market that ski resorts total addressable market or you say well we're making a cup holder that fits in Priuses and toyota sells six billion dollars of Priuses every single year that's not your Tam that's Toyota's Tam so you're gonna have to do a bottoms-up calculation none of this top-down none of this 1% of so that Tam calculation that we're gonna start to get into is gonna be the number of customers times your price it's simple but there's a few big traps in that simplicity and mistakes that we see startups after startup make this week alone I've probably talked to a dozen startups and out of 12 startups 11 out of 12 made these classic mistakes besides the top-down mistakes so let's go into that and break down and give you some examples so when you say the number of customers it's times the number of customers the first question we'll want to understand is well where are your customers are you talking about the US market the European market the global market you're gonna have to cite your data but when you calculate the number of customers what is that total number what is the market that you're addressing the next question is going to be around price remember we're saying that 10 is the number of customers times the price and the question is how do you know that your price is accurate now if you're a little later stage startup and you're raising your Series A or Series B maybe you've been doing some selling and you have accurate pricing we see a lot of early-stage startups and their pricing is highly inaccurate so if you're trying to calculate your total addressable market number of customers times the price and one of those twos numbers is way off the number of customers is way off or the price is way off your total addressable market is unrealistic so big point around pricing have you tested and dearest your pricing because otherwise this is an assumption let me give me an example of a mistake I saw a start-up make the other day they did their Tam they showed the number of customers times the price and I said wait $5,000 per customer per month where did you get that price problem and they said well that's what a competitor charges today and I said well is that what you're gonna charge no no we're gonna charge a tenth of that well then your Tam is gonna be a tenth the size you can't use a competitor's price you have to use your price customers times the accurate price that's bendy rest it's not an assumption you're gonna get towards Tam the other thing we're gonna talk about again and again is when you're showing that Tam and if you're building on a slide using a product like slide bean you're gonna need to document your assumptions on your slide like your high school math teacher used to say show your work so we like to see it dream it and it's great to use a product like slide bean to show this as well when you show your Tam calculation put footnotes on the bottom of the slide as to where that number of customers came from where that pricing comes from and document it and show your work so let's talk through two real-world examples and show you how this works let's do a cybersecurity company first we meet with a lot of cyber security companies hands are waving all the time at how big the market is so let's say I was meeting with an early stage founder and startup and they said look we've got a Swiss Army knife type cybersecurity product it crushes nearly every cybersecurity problem major problem that a company would have so the markets huge cyber security is a trillion-dollar problem and the market size is 250 billion dollars annually that's billion with a B well there's an example number one where the startup just told me the size of the problem I don't need to know the size the problem I need to know their town and they're about to go down that top-down approach where it's a 250 billion dollar market but they barely exist in it so how would you break that down so what we're building is almost like a Swiss Army knife type of cybersecurity product that crushes nearly every problem a company would typically have the markets huge cybersecurity is a trillion dollar of global problem and the market size is 250 billion dollars a year annually so I might drill into that startup and say every company and they'd say well not every company it's really tuned for financial institutions so you start drilling down on that weight all financial institutions you mean credit card companies banks insurance companies mortgage companies and we see this again and again and the cybersecurity startup comes back and says well we don't really it doesn't really address this for insurance companies and credit card and mortgage it's really fine-tuned for bank specific issues cybersecurity problems that happen at banks so I might come back and say wait big banks like JP Morgan Citibank chase HSBC they could come back and say something well no actually it's really good for banks that don't have a see so you know a chief information security officer it's really fine-tune and grape for banks that have like a VP of IT or CIO but they don't have a dedicated security function with an IT that's really where our value propositions shines so startup comes back and says something like we're like a security team in a box for small to mid-size banks that's our sweet spot that's where our Swiss Army knife cybersecurity solution really works we keep digging into that more wait US banks South America Mexico is this a regional issue is this a global issue and we've done things like this and dream it you hear people come back well we know it really works for North America South America and Europe we don't have any idea about Asia Africa okay so then we're gonna sit there and say to a start-up like that if they're trying to calculate Tam and just first get a grip on the customers so you're gonna need to figure out how many medium and small banks there are in North America South America Europe Asia and Africa are gonna be icing on the cake but the total number of customers that you're gonna focus on particularly ergo to market strategy in calculating Tam is gonna be those target customers that really fit the criteria of what you're looking for in the geographical regions you're looking for so as you think about all these things if you think about your target customer the target geography this is how you're gonna start to calculate what the real number of customers are for your particular Tam now remember we said Tammuz number of customers times the pricing so what's the pricing so I might say to a start-up so tell me what your pricing is well we think it's gonna be around ten thousand dollars well ten thousand dollars per what unit of measure per month per user per bank per branch can we see these problems again and again what's that unit of measure and a lot of this gets back to willingness to pay or wtp what is that customer willing to pay and what is that unit of measure that you're using one calculate pricing so now what you're gonna do let's say they came back well it's $10,000 per branch not just per customer but these are banks and banks have branches so they could come back and say well it's $10,000 per branch per month for small and medium-sized banks in North America South America and Europe okay now you can come together and calculate what your real Tam is the number of customers times the pricing and think it through and oh by the way if you remember when we started with this example it's a two hundred and fifty billion dollar a year market all of a sudden you're two hundred and fifty billion dollars a year is two hundred and fifty million dollars a year and you might be thinking I was wondering why I wasn't getting meetings with investors when I'd send them my pitch deck because they were laughing at your Tam slide because your calculation is way way off because you're not thinking realistically about the customers are going after the customers you're targeting and what your real pricing is by the way the example I just did of the cyber security company a dream that we call that narrowing of the TAM funnel right we start with this really big town but the startup is unrealistic around who the real target customers are and the more you drill down the more you think critically about who your true target customers are the narrower and narrower your funnel gets to what your real market size is it's a common common mistake we see so just make sure as you think through what your Tam is you're talking about your real target customer we find also people are way off about pricing this is for both pre seeds seed and series 8 companies you need to nail this because an investor wants to understand how big a marketer you're going into so realize we see most startups are wrong about both things number of customers and pricing and if you're multiplying two wrong numbers times each other you have a huge problem on your hands your total addressable market is ridiculous and not realistic for it you're looking to do let's think through slide bean right what would we think about if we were talking to kiyah and going through this same drill so I would ask slide bean as a start-up or as a company who's your target customer for instance is it all startups like angel and seed startups is it series a B C and D level startups for instance are uber and airbnb gonna use slide bean as they're doing their mezzanine around raising four billion dollars probably not like a lot of great companies a lot of great startups they know where to focus slide bean focuses on early stage it's perfect it's a perfect fit now I might also ask who's your target customer is it Pizza Shops is it laundry or is it high tech startups because what I want to try to do is start to narrow that funnel and really make sure I accurately understand who that target customer is next question is gonna be around pricing well we know what slide being pricing is today but think early on what's your pricing and how do you know the next thing we think about is geography is it all companies is it globally or is it specific regions for a company like sly bean it's probably global but something to think about is you think about that narrowing of the funnel so now slide bean as a company has been evolving over time and they have a new service offering right so now they'd have to do their Tam of both the product and the service are they the same target are they different targets is the pricing different so now the Tam in this situation you'd add up the Tam of the product offering the Tam of the service offering and that would be the combined Tam and you do the math and you do that all bottoms up that's how we do sloppy by the way as we talk about Tam let's also hit upon what investors venture capital investors are typically looking for they're often looking for companies that are going into a billion-dollar market that billion dollar market minimum is defined as your market it's gonna be based on your pricing why is that they want to make sure you have enough room to maneuver the markets big enough if you just get that 1% that means you're doing 10 million dollars in annual recurring revenue it's a big enough market to support a venture back startup so there's a lot of variations to startups and what I want you to do is that I want you to challenge your thinking and challenge your assumptions this model works again and again across industries whether you're b2b b2c D to C whatever markets you're going into it works let's say you wanted to build a new social network well what are the total number of users you're targeting x what you could do for advertising how are you going to make money you need to think those issues through are you gonna be on pay-per-click or is it gonna be cost per thousand CPM how are you estimating it what's your premium you're going to charge for all this so the same model works how many customers what's the revenue or what's the pricing per customer or per whatever unit you're selling let's say you wanted to do build a new product or device same model works you want to build a new e-commerce company tam calculation works you want to do dtc tam calculation this way works you want to build a company to compete against air B&B and VRBO same model works what's that target number of users what's the pricing going to be okay so that's it what's a great tan it's not top-down it's not the size of the problem and it's not the size of the market today it's not what everybody else is doing what all of your competitors are gonna be doing it's gonna be your Tam what's your Tam it's the number of your target customers times your price remember to show your work site the data and also talk about the geography that you're estimating with it so Cayenne sly bean thanks for having us on at dream it we work with startups and secure tech urban tech and health tech every single day if you're interested in learning more about us and seeing the content we create please check out dream adventures on YouTube thanks for watching [Music]

Channel: Slidebean

Views: 228,299

Keywords: How to estimate the Market Size, TAM, total addressable market, Caya slidebean, Slidebean CEO, total available market, how to calculate market size, market size, tam definition, how to estimate market size, startup company, pitch deck, Steve Barsh, total addressable market calculation, total addressable market definition, how to calculate market size for startup, starting a business, total addressable market vs market size, pitch deck presentation, total available market (tam)

Id: M_RMTC2YmXY

Length: 14min 38sec (878 seconds)

Published: Tue Feb 25 2020