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TAM


Total addressable market (TAM) is an estimation of how big your business can become.

Why it matters:

  • The larger the market, the larger the business can become. No point collecting pennies when you can earn dollars within the same effort.
  • This exercise helps you list down your assumptions and risks that you will need to overcome.

How to estimate?

  • Top-down: Go through large statistical datasets like census, surveys, etc. to identify total users, average household spending, etc. Then reduce it down by adding assumptions. For example, the geography you intend to serve, outliers, legal limitations, etc.
  • Bottom-up: Break down your system into an Unit Economics equation. For example, product, frequency of use, price, accessible customers, Conversion Rate, Churn, etc. and then estimate each variable.
  • Comparables: Which are the other markets, companies, product categories, and business models that have scaled and serving the same customers that you will serve?
  • Replacements: Often new products are replacements for existing products. For this scenario, estimate the replacement product’s market and your probability of replacing it.
  • New demand: In some situations, your products create new demand for something that consumers don’t spend on today. This is much harder to estimate and requires understanding target markets purchasing power.

Triangulate the estimation: Once you have estimated your TAM with multiple methods, then keep changing the assumptions or discover new data until all three models agree.

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