- What is your Total Applicable (or Available) Market?
In general, there is data available for the TAM of any product or service, even if your product is revolutionary. For example, software as a category can be broken down into business or consumer applications, and then even further as operating systems software, games, business productivity software, and so forth. Rely on the work you did developing your use cases and scenarios to help you define the proper industries to include in this larger figure. Many entrepreneurs only use the TAM in their calculations – this is a BIG mistake, and shows they have not done their homework. The TAM shows the larger industry trends, but that’s about it.
- What is your Served Available Market?
This is the slice of your TAM, which actually applies to your product group. If there are competitive products on the market, the SAM is the market which all of them currently serve. If your product or service is new, and there is nothing like it on the market, then you need to define the value of like-services, that is, the value of products or services that individuals and companies use today because they do not have your product. You may need to get creative here, but if you understand your offerings, this is not as difficult as it sounds.
- What is your geographic reach?
You’ve just created a product, and now you’re going to sell it worldwide? Is that a reasonable plan? Not likely. Understand the limitations of product and your customer footprint. Modifying packaging and providing support for expansion into foreign markets can be expensive, not to mention the costs of international sales and marketing, putting partnerships and sales channels in place, etc. Don’t write off foreign markets – just plan for them later, building off the success of markets you know.
- What are your primary channels of distribution within that reach?
Once you have defined where you will sell your offerings, you must define how you’ll move product within that geography. Is your website enough to support your projected sales and growth? Probably not. How are comparable products being sold?
- Who are your key partners for sales and marketing within those channels?
Scalability is critical to growth and market share. Do you have the necessary relationships in place to develop those channels of distribution, and get your product in front of the customer?
- What will it cost for you to capture 10 to 20 percent of that market?
Now that you’ve defined the size of your market, your channels of distribution, and the partnerships to get you there, what will it all cost for the next 3 to 5 years to make this plan happen? It’s a good practice to know the weighted cost of each employee you bring on, and the number of resources you’ll need to achieve the market penetration you’ve outlined in your prospectus. Understand the numbers behind the numbers you present to investors, and how the level of investment you need, increases or decreases based on changes to your penetration numbers. Investors will want to understand whether another million more, for example, could increase penetration from 20 percent to 40 percent, or if due to other factors (market conditions, competition) it would only increase it to 22 percent. If you can answer this kind of question, you will shine.
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About Red Hill Partners
Red Hill Partners is a consortium of business and technology experts whose focus is helping both individuals and entrepreneurial companies with the tools, processes, and content crucial to achieving business and technological knowledge and market leadership. We are global advisors, writers, and educators, providing education, counseling, and research to individuals, corporations, new ventures, and associations interested in the constantly shifting patterns and prevailing practices of modern business.
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