How Big Is Your Market?
One of the first things an investor considers before investing in your business is how big is your market. Your total addressable market (TAM) is how big your business could theoretically become if it were to control 100% of its market – if every possible customer was a customer of your company and you had no competition. This is an important consideration because the larger the market the larger the business can become!
Obviously, few businesses will ever come close to 100% market share and the TAM is a yardstick used to compare different businesses instead of a measure of a specific business. If you are considering investing in a business with a TAM of $10M and another with a TAM of $100M, the latter company has more potential, because its market is larger. If you assume a successful business might own 10% of their TAM (much more realistic than 100%), then it becomes easier to compare these businesses since $1M < $10M.
But how do you figure out your TAM? What if you are a new business who does not yet fully understand who your customers will be? What if you are in a new market that is growing and changing every day?
This week we’ll cover techniques and considerations for sizing your TAM. Specifically:
- Part 2 – Top Down Market Sizing
- Part 3 – Bottom Up Market Sizing
- Part 4 – Using Comparables
- Part 5 – Sizing a New Market
As you’ll see, market sizing requires a significant amount of creativity on your part since you will need to make many assumptions to create an estimate. We will get started with top down market sizing tomorrow!
Statistic of the Day: $1.2 Quadrillion (1.2 x 10^15) – An estimate of the total size of the derivatives market, the largest market in the world.