What’s in product:market fit…and how to we get to an addressable audience?
Total Addressable Market or TAM is a term typically used in highly capitalized tech startups emerging from the venture capital community, HOWEVER, it’s highly applicable to and easily calculated by ANY entrepreneur. Whether you have a small specialty retail store, a freelance consulting business, sell your photography or artwork online, or have any side hustle income goals, a TAM will help you define the market in which you operate and frame early marketing decisions. There are a couple simple concepts to understand first and then we will walk through an example calculation.
A common mistake is forgetting the “A” in TAM and producing a massive number. You sell craft jewelry designed for young professionals and you tell yourself: well if I could just get .1% of every female between 21-35 I’d be doing great! This isn’t a bad start, but it’s not going to help you when you start thinking about your ADDRESSABLE audience and how to segment and market to them. It also won’t help when you try and define your competitive landscape and it turns out you compete with absolutely everyone!
It’s important to understand the layers of addressability
Who can I sell to tomorrow vs. 5 years from now…10 years from now? We tend to think of addressability on a scale with increasing relevance in to us as we get more refined in our audience definitions and with increasing applicability of our product as we narrow the definition of our offering.
We think of our market on a timeline and level of refinement to find product-market fit
On the far end of the spectrum we have what we call a Market Landscape within which there are numerous addressable markets that might find value in our broadest possible definition of the Value we offer. This might be in a mission or Concept Statement and it answers the question: we provide what value to what people? We think of this on a decade-long scale, in other words what can we say about the audience we are addressing and the value we are offering that we believe will hold true for 10 years. If I am a science fiction writer my audience may be science fiction enthusiasts but over the next 10 years I might have a multitude of addressable markets that I may enter such as film, TV, books, blogging, reviews, etc.
In the middle is our Total Addressable Market, where an audience is a demonstrable and quantifiable group of individuals that seek our value delivered in the business model we have chosen. You cannot chose your business model as a self funded entrepreneur as much as the model chooses you, because without infinite marketing dollars, the addressable audience consumes your equivalent value in some way today and they are unlikely to change those habits just because of little old you. The Total Addressable Market, or TAM, is the crux at which we refine our broad concept into a demonstrable business opportunity. It says, if this group of addressable people spends the typical amount of money for the delivery method for which they typically choose to consume this value each year, how big is the market? If we are a science fiction writer we are addressing science fiction readers in English speaking regions and if our business model is a books published on Amazon we are entering the Total Addressable Market of science fiction books sold each year. We tend to think of TAM as the market we will serve over the next 5 year horizon; we may have numerous segments and even products along the way, but it is the core tangible focus of our business for the foreseeable future.
In our most refined view, we identify Customer Segments, or groups of customers that may be small in number, but are highly relevant to our immediate product offering. Most importantly and uniquely from addressable audiences, they are not just quantifiable, but have similar needs, interests, forums, though leaders, and behaviors that we can leverage to more effectively market to them and position our product to their needs. For our science fiction writer this may be those science fiction readers with a particular interest in Artificial Intelligence or perhaps Dystopian Futures…both of which being common themes in our book. Or perhaps it’s not interest driven at all, but is science fiction readers who subscribe to audible which would be an example of a positioning change we may decide to pursue for our product in order to meet that segment. We think of customer segments and product positioning on a 12 month horizon. These need constant re-assessment and change rapidly as the market or our understanding of that market evolves.
The TAM is where we like to spend most of our time when we are in a pre-launch phase and deciding where our efforts will focus for the products we roll out, the competitors we identify, pricing strategy, marketing strategy, really all core aspects of how we might go to market. TAM is something venture capitalists require to see in a tech company because if it is big enough a disruptive entrant can take a meaningful share of it, or even change the audiences desired business model. We like Netfix as an example of this where the TAM was and is people consuming video entertainment at home, but what used to be Blockbuster rentals is now a subscription service. As a self-funded entrepreneur we will not be the next Netflix changing a market but we need to pay attention to those underlying changes in our market and how we may need to adapt in the coming years to new pricing and audience demands.
We stress the importance of intuitively understanding this give and take between product and market refinement ideally before launching any business opportunity, because so often we see entrepreneurs make common mistakes that arise from a lack of market understanding. Some will try to build an audience before they ever really have a business model or product positioning in mind, and when it comes time to actually create a business they are left with a very small % of their audience that is relevant enough to monetize. Alternatively, many entrepreneurs will rush ahead with a product just because they have identified with either their capabilities to launch it or worse a fleeting market inefficiency that has created temporary advantages (we point to the massive gold rush to launch a podcast of late). If this is done without regard to the addressable audience behaviors and segments in your particular market you may very well find a beautiful product holds little relevance.
If you are interested in learning more about finding that product market fit before launching your self-funded business we encourage you to check out our course on Concept to Opportunity.