How To Calculate Your Startup’s Total Addressable Market (TAM) The Right Way | Dose 002

Welcome to the Dreamit Dose. In the next five minutes, we're going to talk about how over half the startups we see get total addressable market, or TAM, totally wrong. They make the same few mistakes every single time. It's time to fix that. Let's dive in. First big mistake we see people make. They say, oh, if I could just get one to two percent of the market it's a huge total addressable market. Absolutely note. You cannot do a top-down estimate. You've got to come bottoms up. Next thing people do, say OK great I'll do it bottoms up. The first example they'll say is, wait a second, look how big the problem is. The total addressable market. They say look at the impact. For instance, a very unfortunate problem in the U.S. today is the opioid crisis. They'll tell us the opioid crisis is a 100 billion dollar problem. Right. That's the size of the problem it's not the size of the market. You can't define the size of your market being the size of the problem. Doesn't work that way. That just shows how much pain is around the problem. Next big mistake we see people make. They say look the markets absolutely huge. There's so much room in it. The market, for instance, Toyota sells in Priuses In the United States today about six billion dollars worth of Priuses. Right. That's the size for Toyota of the Prius. That's not the size of your market. Let's say you're selling into the automotive market or you're selling into the hybrid market. That's not the size of your market. That's the size of their market. And oh by the way, you don't even exist yet. So it doesn't count for you. That's not your total addressable market. Let's take that example a little bit further and I'll just come up with something a little out there but we see some crazy things. Somebody says, I'm making a cup holder for Priuses. I'm selling into a six billion dollar market. No. Six billion is the value of the market for Toyota. They sell Priuses You sell cup holders. And we looked up online, Priuses they sell about two hundred thousand of them a year You sell a five dollar cup holder. That means your total addressable market on a yearly basis is a million dollars, not six billion. That seems a little extreme. We see things like that and we talk to thousands of startups a year. We see people make simple basic mistakes like that, every single day. I realize I'm going fast. Please leave your questions in the comments section. And make sure to subscribe, because we have a lot more coming. OK. So how do you do the TAM correctly? Pretty straightforward. How many customers times the price. So, what's your total available market of customers? What's the price you're charging? That is your TAM. Some things to think about and be careful when you talk about customers. Is it truly your target customers? The real people that are going to use it. Be careful that they are real potential customers and buyers. Next. What part of the world? Is this your U.S. TAM, your global TAM, your E.U., your Asian TAM, your rest of world TAM? You really have to carefully think about that and cover it. The next thought is, pricing. If you're super early stage and you haven't sold anything yet, how do you know that's the price you're actually going to get? How do you de-risk that critical critical assumption? Because if that assumption is way off, your TAM is going to be way way off. Next couple of things to think about, really important, just like your high school math teacher said. You've got to show your work. So when you're doing the TAM, make sure to document the information, show it when you do your TAM calculation, include it on the slide, and cite your data. For instance, if you say this is how many customers. We want to know why? How do you know that? Where do you get that information from? And is it relevant information? Is it current information? That's it. You can't do it top-down, you've got to do it bottoms up. You can't talk about the size of the problem. You can't talk about how big somebody else's market is. It's really straightforward. Customer times price. That's your TAM That's you're Dreamit Dose in five minutes. Really look forward to answering your questions in the comments. See you next time.

Channel: Dreamit

Views: 63,687

Keywords: Dreamit Ventures, Startup, Tech, Incubator, Accelerator, Growth, Philadelphia, New York, Venture Capital Company, Venture Capital Financing, Venture Capital Process, VC Fund, How To, Investment Firm, HealthTech, SecureTech, UrbanTech, Early Stage, Seed, Angel Investors, market size, total addressable market, value proposition, TAM, startup company, potential market, tam definition, how to estimate market size, startup stories, startup school, lean startup methodology, private equity

Id: KaftxzizjYY

Length: 4min 8sec (248 seconds)

Published: Thu May 16 2019