Every business needs to identify and validate its business idea before introducing it to the market. Studies have shown that 95% of startups fail mostly because the product or service it offers is not product-market fit.
There are a few steps you could do to mold it into a product-market fit:
- Calculate your Total Addressable Market
- Create Customers' persona
- Impact vs Effort Analysis
This article will explain the first step, calculating Total Addressable Market (TAM) in your segment. This calculation will show you (1) Potential customers that you can address in your market and (2) Possible transactions in a single market.
Before you calculate your Total Addressable market, there are several things you need to know:
- Where you are selling your product
- Who your target audience is
- The categories of your audience
- The income level of your audience
- Which age groups are more likely to buy your product
- What is their behavior to your product category
These kinds of data need to be identified first before you can calculate your Total Addressable Market. The more precise your data in numbers, the more accurate your TAM.
Calculating Total Addressable Market
Before you begin to calculate your TAM, you have to identify several cuts to clarify and specifically target who your customers are. There are a few steps that you need to identify:
- Total Population
- Narrowing the Numbers Down and Be Specific
Find the total population of people in your pre-selected demographics, this could be obtained from your representative country or region data. After you identify the total population of the representative area, you need to cut down the numbers by putting additional information into the total population. These include identifying which age groups and gender groups would buy your product.
To create a more accurate representation of your data, you need to cut numbers down and segment who your real target market is. If you are selling MYR50,000 worth of fine watches for men, you know the majority of your customers will be men and that you won’t be selling to those who earn less than, let’s say, MYR10,000 per month. However, you need to justify the consumption behavior of your target markets.
The ‘cuts’ are not fixed and can be added or reduced until the numbers are eligible to identify your TAM. You could obtain this data through the government or through industry and market reports from market research companies.
After you identify the numbers of who your real target market is, multiply the numbers of your potential transactions based on your product lifecycle. If you sell a product that is to be replaced monthly, and you’d like to create your annual TAM, you should multiply the numbers of potential customers by 12. That’s your product lifecycle.
The Total Addressable Market calculation will be useful for many things. It sets your market penetration, and KPIs to your marketing or business development team.
Let’s assume that you are about to sell cappuccino to your class. However, you’re not sure on how to set the target of your daily cappuccino sales. You decide to start the day early in the morning to brew your homemade cappuccino, setting the price point at RM5 for a cup of hot cappuccino.
Calculating TAM : Population
There are 30 people in your class
15 men, 15 women
70% of men who drink coffee daily
50% of women who drink coffee daily
3 men, out of those who drink coffee daily, are lactose intolerant and only consume black coffee
2 women, out of those who drink coffee daily, drink it before class
In return we have,
30 in total
10.5 men who drink coffee - 3 lactose intolerants = 7.5 men
7.5 women who drink coffee - 2 women who drink before class = 5.5 women
So out of 30 people, you will have 13 potential customers.
On the other hand, there are two breaks during school. Based on your product lifecycle, you know you are able sell two cappuccinos per customer during the first break in the morning and the second in the late afternoon.
Which means that you will be able to potentially sell 26 cups of cappuccino per day, making that your TAM. From this can you start setting a target to sell cappuccino in your class, calculating your market penetration rate.
How Can You Obtain These Data?
By asking each one of your classmates their behavior and preferences about their coffee consumption, you are familiarising yourself with your market and their wants. For businesses, market research is recommended. However, you can also obtain any available data from your government representative.
What Happens If My Sales Don’t Meet My Expectations?
Using the coffee case as an example once again - After a day of selling cappuccino in your class, you find out you’ve only managed to sell 6 cappuccinos. No worries, how you can fix this and increase your cappuccino sales is by identifying their preferences. This can be done by creating your customer persona, which you can further read about on our Vase blog here