Total Addressable Market
May 2007 (School for Startups)
This is not simply the size of the industry you are working in. It is tempting to quote large figures for the wider market or industry to impress investors, but they will not fall for it. They want to see you have done your homework and segmented the wider market into the total addressable market of your product.
For example, an entrepreneur has designed a new aircraft engine component to enable more efficient burning of fuel. The aim is to sell to aerospace manufacturers for light passenger aircraft. This is how he might segment the market:
- The TAM is within the aerospace industry.
- The TAM is within the aerospace components market segment.
- The potential market is made up of the customers who might buy the specific component.
- The total addressable market is the market for the specific component as sold to light aircraft manufacturers and repairs suppliers. These are the customers with an interest in the product.
- The initial target market may be the market for the specific component as sold to light aircraft manufacturers who are able to fit the component to their engines.
- Each competitor within this market will have a certain market share.
Clearly at every level we see the market figure dropping. A push into the initial target market will result in manufacturers fitting the component, leading to a pull from the addressable market, as replacement parts will be required. The long-term value is held in the addressable market.
How This Relates To Your Business
- The addressable market is an estimate of how much a company would make in sales if there were no other competitors.
- This can be calculated by top down calculations, segmenting the market to find the relevant segment to the entrepreneur’s product. Or it can be calculated bottom up, by identifying the customers along with how many units they buy per year and at what cost.
- The addressable market is a measure an investor will use to gauge how attractive an entrepreneur’s venture is. Investors will certainly not put more money into a company than is available in its addressable market, and they will also consider how much market share the start-up is likely to take. If these figures are too low, they will not invest.
- The addressable market will change over time. In particular investors will often look for growth markets.