Three ways to look at a startup's total addressable market
“Sizing the market is one of the most important things you need to do in the early stages of your startup,” says Robyn Ward, former head of business development at BetterWorks in this interview with DocStoc.
Determining the total addressable market is important for both the business owner and potential investors. The TAM is not just the size of the industry you’re working in, but rather an estimate of the revenues that a product could generate over time. And there are a few different ways to look at this, Ward says.
With a top-down approach, you take the value of the industry as a whole and break it down by which sector your product falls into and how it’s going to be sold. “You can also back that up with a bottom-up approach,” Ward says, which involves taking an estimate of how many customers you think you can capture and multiplying that by what you think your market price is.
To look at it a third way, take the size of your competitors to determine a total market size, and then figure out what chunk of that market you think you can capture.
Investors like to see growth, so no matter how you calculate your addressable market, she cautions, be sure to show the potential for growth over five years.