PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
Step4:
CalculatetheTotalAddressableMarket(TAM)
SizefortheBeachheadMarket
Itisimportanttostarttounderstandthesizeofthemarketyouaretargetingearly;youwillmodifythis
astimegoesonbutitiswisetobethinkingaboutthispointearlyonandkeepingtrackofanumber
Page|44
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
Step4:CalculatetheTotalAddressableMarket(TAM)Size
fortheBeachheadMarket
:::InThisChapter,YouWill:
:::Usethedemographicsfromtheenduserprofiletodeterminehowlargeyourbeachheadmarketis
ThebeachheadmarketandEndUserProfilegiveyouenoughspecificitytomakeafirstͲpasscalculation
oftheTotalAddressableMarket(TAM)sizeforthebeachheadmarket.TheTAMforyourbeachhead
marketistheamountofannualrevenue,expressedindollarsperyear,thatyourbusinesswouldearnif
youachieved100%marketshareinyourbeachheadmarket.
Thegoalofthisexerciseisnottowritedownabignumbertoimpressothers,buttodevelopa
conservative,defensiblenumberthatyoubelieve.EntrepreneursoftentendtoinflatetheTAMwith
excessiveoptimism.However,abignumberisnotnecessarilybetter.
Youarelookingforamarketthatisbigenoughforyoutogettocriticalmass,developkeycapabilities
andgettocashflowpositiveinthemarket.Ontheotherhand,ifthemarketistoobig,youwilllikelynot
havesufficientresourcestocompeteandyoumaygetoverwhelmedandeithernotsucceedorhaveto
raisemoneywithoutmuchofatrackrecordforpotentialinvestorstoevaluate.
TocalculatetheTAM,youwillfirstdeterminehowmanyendusersexistthatfityourEndUserProfile,
primarilyusingabottomͲupanalysisbasedonprimarymarketresearch,withlimitedtopͲdownanalysis
tocomplementyourprimaryresearch.ToomuchtopͲdownanalysiswillleadyoutofocuson
spreadsheets,notcustomers,andIhaveneverseenareallivecustomerhidinginacellona
spreadsheet.Then,youwilldeterminehowmucheachuserwouldspendperyear.
BottomͲUpAnalysis
ThebestwaytocalculatetheTAMisabottomͲupanalysis,oftentermed““countingnoses.””Showfrom
yourprimarymarketresearchhowmanyendusersyouhaveidentifiedthatfityourEndUserProfile.
Customers,tradeassociations,etc.canhelpyouidentifyhowmanycustomersthereare,aswellashow
manyenduserseachcustomerhas.Sometimeswerefertothisas““countingnoses””becauseyouare
gettingveryspecificandyouknowwhereeachpotentialcustomerisandhowmuchtheycouldspend.
TopͲDownAnalysis
AtopͲdownanalysisstartsbyusingsecondarymarketresearch,suchasmarketanalysisreports,to
determinehowmanyendusersmeetdifferentcharacteristics.Thisdataisusuallyexpressedwithan
invertedpyramidthathasseveralhorizontallevels,wherethebottomͲmostlevelisthesmallestand
containsallenduserswhomeetyourEndUserProfile.AtopͲdownanalysisshouldbecomplementary
toyourbottomͲupanalysis.Itisoftenmuchhigherbecauseyouarenotasspecific.
Page|45
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
From““HowManyEndUsers?””to““ShowMetheMoney””
OnceyouhavecountedthenumberofenduserswhofityourEndUserProfile,determinehowmuch
annualrevenueanindividualenduserisworth.Multiplyingtherevenueperenduserbythenumberof
enduserswillgiveyoutheTAM.
If,byanychance,theTAMislessthan$5millionperyear,itcouldbeaproblembecauseitisanonͲ
trivialpossibilitythatyouoverestimatedthesizeanditisgenerallyveryoptimisticthatyouwillget50%
oftheTAMinareasonabletimeframe.Also,ifyouareseekingoutsidefunding,thiscouldbeaproblem.
Generally,theinitialmarketsizeofabout$20millionperyearupto$100millionisagoodtarget.
Anythingover$1billioncertainlyraisesflags.Anythinglessthan$5millionperyearcanalsobea
problembecauseitisgenerallyveryoptimisticthatyouwouldget50%oftheTAMinareasonable
timeframe,andsuchasmallnumberwillmakeitmoredifficulttoconvinceinvestorsthatyoursisa
worthyopportunity.
ItispossiblethataninitialTAMof$5millionperyearcouldbeagoodthingifyoucantrulycapturethe
marketquicklyandconvincingly,especiallyifthegrossmarginswouldbeveryhigh(e.g.,90%asitwould
beforsoftware,apps,informationplays).Thiscouldcreatepositivecashflowfromthemarketwhich
wouldbeasignificantaccomplishmentandagoodbeachheadmarket.
Hencethekeyfactorsarenotjustsizebutalsogrossmargin,speed,potentialfordominantand
sustainablemarketshare,andstrategicvalue.Butsizedoesmatteranditisacommonlanguageweuse,
soitiswellworthdoingthecalculationbutnotspendinganinordinateamountoftimeonit.Asyou
learnmoreinthelatersteps,youwilllikelycomebackandrevisitthiscalculationandmodifyittomake
itmorecredible.Thatisagoodthing.
Examples
SensAbleTechnologies
OurfocusallowedustodoabottomͲupanalysis,countingrealcustomers.Sincewehadalotofdialogue
withtheuserbaseandbuiltuptrustandconfidence,wewereabletoeasilydeterminehowmany
industrialdesignerswereatonecustomer,Hasbro,andwewereabletoeasilydeterminehowmany
othermajortoycompaniestherewere.WealsobefriendedastafferattheIndustrialDesignSocietyof
Americawhohelpedusrefinethislist.
ToyIndustryListofCustomers:
x Hasbro(U.S.,Asia,Europe)
x Mattel(U.S.,Asia,Europe)
x FisherͲPrice(U.S.)
x FPBrands(U.S.)
x Creata(US,Asia)
x EquityMarketing(U.S.,Asia)
Page|46
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
x
x
x
x
x
x
x
x
x
x
x
x
x
MarketingStore(U.S.)
Gemmy(U.S.)
GentleGiant(U.S.)
Whitestone(U.S.)
Bandai(Asia)
Tomy(Asia)
Unitec(Asia)
HermonIndustries(Asia)
LuenShing(Asia)
Synapse(Europe)
Schleich(Europe)
Playmobil(Europe)
Disneyland(Europe)
Oneearlyrealizationwasthattoycompaniesexistedinthreedifferentgeographicregions––theUnited
States,AsiaandEurope.Wehadnotadequatelysegmentedthemarket,andwouldneedtochooseone
ofthesegeographicregions.9Abetterwaytodisplaythecustomers,then,wasathreeͲcolumnchart:
Europe
x Synapse
x HasbroE
x Schleich
x Playmobil
x Mattel
x Disneyland
ToyIndustryListofCustomers
U.S.
x Hasbro
x Mattel
x FisherͲPrice
x FPBrands
x Creata
x EquityMarketing
x MarketingStore
x Gemmy
x GentleGiant
x Whitestone
Asia
x
x
x
x
x
x
x
x
x
Bandai
Tomy
Unitec
Creata
HermonIndustries
LuenShing
Mattel
Hasbro
EquityMarketing
Thenwecalculatedhowmanyindustrialdesignerswereateachcompany.WeknewHasbro(bothU.S.
andEurope)withgreatcertainty,boththenumbertheyemployedandusedviaoutsourcing,sowehad
avaluabledatapointinthatweknewwhowithinthecompanywouldgreatlybenefitfromourproduct
andwouldbeexcellentcandidatestobuyit.WethenspoketoourfriendsatMattelandFisherͲPriceand
determinedwithhighconfidencethenumberofindustrialdesignersateach.
Aswedeterminedtheexactnumberofdesignersatanumberofcompanies,wewereabletostart
calculatinga““designerdensity””wherewecouldestimatehowmanydesignersacompanyhadbasedon
theirannualrevenueandnumberofnewproducts.Thecalculationhelpedusmakeeducatedguesses
9
Weactuallysoldtoallthreemarketswhenwestartedoutbecausewedidnotyetunderstandthevalueof
definingmarketswithspecificity.
Page|47
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
aboutothercompanieswherewedidnothavesufficienttimeorconnectionsto““countnoses.””We
neededseveraldatapointsofactualnumbersofdesignerspercompanybeforethecalculationwouldbe
accurate.
Wedidthesameprocessforthefootwearindustry:
FootwearIndustryListofCustomers:
x Adidas(US,Europe,Asia)
x Nike(US,Asia)
x NewBalance(US)
x Reebok(US,Europe,Asia)
x Fila(US,Europe)
x EccoDesign(U.S.,Europe)
x StrideRite(U.S.)
x Spalding(U.S.)
x Rockport(U.S.)
x Timberland(U.S.)
x Wolverine(U.S.)
x DocMartens(Europe)
x Alsa(Europe)
x Gabor(Europe)
x KurtJohn(Europe)
x Clark(Europe)
x RegraDesign(Europe)
x PouChen(Asia)
x FengTay(Asia)
x ASICS(Asia)
ThenumberofindustrialdesignerswasakeyinputtotheTAM,butnowwehadtodeterminehow
muchbudgetperdesignerexistedatthecustomer,whichrequiredadditionaldataaswellassome
assumptionsandcalculations.Westartedbylookingathowmuchcustomersarespendingtodayfora
similarbutinferiordigitalproduct,ortosimplygetthejobdonewithoutanydigitalproduct.Whilethere
areothercoststhecustomermaypresentlyincur,suchasshippingandscanningofphysicalproducts,
elongatedproductcycles,andadditionaliterations,wefocusedonhowmuchthecustomerspendsper
designerasitwasaneasierdatapointtotabulateandseemedtobestrepresentourmarketpotential.
Eachcustomerbudgetsforaclayworkbenchforeachdesigner,whichwhenfullyequippedcosts
approximately$20,000perbenchintheUnitedStates,withafiveͲyearreplacementcycle.Each
customeralsobudgetsforeachdesigneradigitalworkstationandsoftwarethatcostsabout$15,000
eachintheUnitedStatesandhasathreeͲyearreplacementcycle.Bothofthesecostswouldbe
displacedbySensAble’’sproduct.
Wealsoincludedanestimatedannualgrowthrate,basedonourprimarymarketresearch.Whileitdoes
notdirectlyaffecttheTAMcalculation,itisausefuldatapointforfuturestepsthatwecaneasilycollect
Page|48
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
duringthisroundofresearch,andapositivegrowthnumberisagoodindicatorofahealthymarket
opportunity.
TAMCalculationforSensAbleTechnologiesBeachheadMarket
IndustrialDesigners/Sculptors(Toys)
IndustrialDesigners/Sculptors(Footwear)
EstimatedAnnualGrowthRate
PrimaryMarketResearchShows:
Priceperclayworkbench
Priceperdigitalworkstations
Lifeofphysicalclayworkbenches
Lifeofdigitalworkstations
Annualexpenditureperdesigner(calculated
fromabovebasedonassumptionthateach
designerwillhavebothaclayworkbenchanda
digitalworkbenchgoingforwardandwecan
replacethembothwithouroffering)
TAMCalculation:
IndustrialDesigners/Sculptors(Toys)
IndustrialDesigners/Sculptors(Footwear)
TotalTAMforBeachhead($/year)
U.S.
1,500
750
Europe
1,000
500
Asia
1,000
500
8%
8%
8%
$20,000
$15,000
5
3
$20,000
$15,000
5
3
$15,000
$10,000
5
3
$9,000
$9,000
$6,333
$13,500,000 $9,000,000 $6,333,333
$6,750,000 $4,500,000 $3,166,667
$20,250,000 $13,500,000 $9,500,000
OnDemandKorea
SomeofourstudentsatMIT,ofwhichsomebutnotallwereKorean,noticedaverysimplemarket
opportunity.KoreansintheUnitedStateswereparticularlyinterestedinstayingintouchwiththings
goingonintheirhomeland.OneofthemajorwaystodothisforKoreanswastowatchKoreansoap
operas.Thestudentsnoticedthatmanyofthemvisitedwebsiteswheretheycouldseebootleggedand
lowͲqualityversionsoftheseshows.Withtheirbackground,technicalskillsandconnections,theywere
confidentthattheycouldbuildasitethatwouldproducemuchhigherͲqualityvideoanddoitlegally.
TheanalogywouldbeiTunesascomparedtoNapsterorKazaa.
SotheteamdutifullybuilttheirEndUserProfileasyoucanseeontheslidebelow.Theythen
determinedthattheaccuratenumberofKoreansintheUnitedStatesisabout2.5million.Ofthistotal,a
subͲsegmentwasinthecorrectagegroupthattheyweretargeting,andofthemonlyasmallersubͲ
segmentwasfemaleandpossiblyfittingtheirtargetcustomerprofile,bringingthepotentialmarket
Page|49
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
downto1.2million.Theywerealsoabletodeterminethroughsomediggingthatthetopthreewebsites
forKoreanswheretheywatchedthismaterialtoday(Joonmedia,Bada,Dabdate)had700Kusersin
total.Theyfiguredthatbasedonthesenumbers,thereexisted400Kendusersintheirbeachhead
market.
WhilethisisanexcellentstarttocalculatingtheTAM,itcannotstopthere.TheTAMisnotanumberof
customersbutratherdollarsperyear.SotocompletetheTAMcalculation,theteamneedsto
determinehowmuchthe400,000potentialcustomerswouldpayinayear.
ThiswouldbeagoodquickanddirtyTAMcalculationforaconsumerͲorientednewventure.
Summary
TheTAMishowmuchannualrevenuethereisavailabletoyouforyourproductifyouachieved100%
marketshare.Thisisonlyforyourfirst““beachhead””market.ThestrongpreferenceisforabottomͲup
analysiswhereyoucanshowfromyourprimarymarketresearchhowmanyofthepotentialcustomer
youhaveidentifiedandthenextrapolatethistothebroadermarket.Complementarytothisbutmuch
lesscompellingonitsownisatopͲdownanalysiswhereyouareworkingwithmarketanalysisreports
Page|50
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful
PRELIMINARYDRAFT––15.390/.366FALL2012ONLY––DONOTDISTRIBUTE––COMMENTS:15390Ͳbook@mit.edu
andextrapolatingwithoutdirectinteractionandvalidation.Often,veryimportantsubtletiesaremissed
intopͲdownanalyses.
Page|51
InnovationͲBasedEntrepreneurship101:AHandbookon24StepstoHelpMakeEntrepreneursMoreSuccessful