Beachhead Total Addressable Market (TAM)

A bottom-up analysis, where you can show how many potential customers you have identified from your PMR and extrapolated to the broader market, will give a more accurate picture of your market. Complementary to this, but much less compelling on its own, is a top-down analysis where you are working with market analysis reports and extrapolating without direct interaction and validation. Often, very important subtleties are missed in top-down analyses, so if you are serious and you have the time and bandwidth, start with the top-down (much easier) but then supplement it with the bottom-up TAM calculation as well. You might not have that luxury now so it is okay to keep moving and come back later.

Our clear market segmentation work in choosing a Beachhead Market allowed us to do my preferred analysis, a bottom-up analysis counting real customers, in a reasonable amount of time. Because we had such a specific Beachhead Market definition, we could get actual real company names and develop an actionable target list to talk to.

In our original PMR, we had already talked with a few toy companies, such as Hasbro, and we were able to easily determine how many other major toy companies there were from generally available data online. We also befriended a staffer at the Industrial Design Society of America who helped us refine this list.

One early realization was that toy companies existed in three different geographic regions—the United States, Asia, and Europe. We had not adequately segmented the market and would need to choose one of these geographic regions. A better way to display the customers, then, was a three-column chart.

Table: SensAble list of customers for the toy industry

Then we calculated how many industrial designers were at each company. Since we had a lot of dialogue with the user base and built up trust and confidence, we were able to easily determine how many industrial designers were at one customer, Hasbro. We then spoke to our friends at Mattel and Fisher-Price and determined with high confidence the number of industrial designers at each.

As we determined the exact number of designers at several companies, we were able to start calculating a number that we called “designer density,” which gave us the number of designers per thousand employees and the number of designers per million dollars of revenue. The calculation helped us make educated guesses about other companies where we did not have sufficient time or connections to do a credible bottom-up analysis.

The result of this work was Figure 4.3, which gave us the confidence to say the market was about $10M-$15M per year (remember, don’t indicate precision you don’t have in these calculations; it is good to give a range). This is on the low end of the Beachhead Market TAM spectrum I mentioned earlier in this chapter but we felt comfortable with it for some reasons. First of all, this was a bottom-up TAM analysis which we were highly confident with, and as opposed to a top-down which is usually overly optimistic, a bottom-up TAM calculation would be on the conservative side.

We were also comfortable because we knew our profit margins (specifically gross margins) would be very high. Finally, we were also comfortable because we knew that if we made this product successfully with our strong intellectual property and capabilities, it would be very hard for others to copy us so we would have a strong competitive advantage to enter adjacent markets.

Table: SensAble Beachhead Market TAM calculation

As mentioned, a bottom‐up analysis is extremely powerful and gives you invaluable insights that are not generally possible through secondary research. Bottom‐up analysis is also very time-consuming and difficult to get information for. If you are unsure about your market or your commitment to this idea, skip this part and come back later when you are more confident about your Beachhead Market and have a deeper understanding of the market. Most plans rely on top‐down analysis, and while I think it’s insufficient, it is the reality that bottom‐up analysis is much, much harder to do.

Worksheet 4.5 uses a concept called “end-user density” that allows you to complete a bottom‐up analysis without the need to identify every single end user in a market since that process can be prohibitively expensive in terms of time consumed.

To calculate end-user density, you’ll first need some way to divide up the market into countable units. For instance, in the SensAble example in Disciplined Entrepreneurship, we sold to companies that employed industrial designers, and they defined their countable entity as an overall number of employees. Their resulting “designer density” for their market was expressed as the number of designers per thousand employees.

For a consumer product, your countable unit could be population, a specific socioeconomic segment of the population, the number of people who own another product, and so on. For businesses, it may be the number of employees, revenue, products released each year, number of customers that the company has, and the like. These units depend on your situation. A clever choice of countable unit for density will give credibility to your TAM estimate, so spend some time optimizing your choice on this unit, understanding it is still an estimate.

Once you have defined your countable unit, go to three instances of this unit and “count noses,” determining exactly how many end users are within that countable unit. Also, determine how many people overall are in that countable unit.

Then, for each instance, determine what the annualized revenue per end user is, based on the unique circumstances of each instance. Do not guess; ask the people from this instance of the countable unit!

Bottom‐Up TAM Analysis Worksheet

• What countable unit are you using for end-user density?
• What are three instances (i.e., real, verifiable examples) of this countable unit you will be using to “count noses”?

• Based on the above table, what is the reasonable estimate of the end user density?
• What is the reasonable estimate of the annualized revenue per end user?
• Based on the end-user density, what is the reasonable estimate for the number of end users in the market?
• What is the reasonable estimate for the TAM (# end users multiplied by annualized revenue per end-user)?

1. Comparing your top‐down and bottom‐up analyses, which do you believe has more credibility? Why?
2. If you blend the two estimations, what is your final TAM size? What factors would make the TAM lower than you calculated? What are the factors that would drive the TAM much higher?

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Content will be published as it becomes available.