Many founders are over-confident and believe their target market is larger than it actually is.
Thoroughly analyze the size of your target market! Make sure it is large enough and that market dynamics support your high growth plan. If your market is not large enough, your growth will ebb away fast.
In my book FastScaling, I dive deep into this topic and explain how to properly analyze the size of your target market. Below some potential considerations.
- If you have clearly defined your key target customers, you can start calculating your total addressable market (TAM). In essence, the total addressable market equals the annual revenues that your business could make if it achieved a 100% market share in your key target market.
- There are essentially two approaches to calculating your total addressable market: the top-down approach and the bottom-up approach (which I explain in detail in my book).
- It is important to think not only about the total addressable market, but also about how much of this total addressable market you can actually serve given your industry, market, company, and business model specifics as well as the time until you want to exit.
- While the actual steps you need to take in order to get from your total addressable market to your serviceable addressable market (SAM) highly depend on your company and industry specifics, you should at least consider your go-to-market approach and other business model specifics. You must exclude all customers you cannot access given these peculiarities.
- Even market leaders do not capture 100% of their serviceable addressable market. Your serviceable obtainable market (SOM) will be a fraction of your serviceable addressable market. Do not work with any rule of thumb but apply some sophistication and methodology. You may, for instance, consider your conversion rate.
- The market attractiveness not only depends on its sheer size, but also on the margins that you can generate and the market dynamics.
- As to market dynamics, you need to analyze how your market is going to evolve. Have revenues already peaked? Is the market saturated? Is the market size decreasing? Or are you targeting a large and growing market that will be even larger when you exit?
- Most investors are obsessed with the size of your target market. You should be, too.
- Strive for market leadership! Market leaders can achieve high valuation premiums. If you can create a market leader in a large market, you are on track to building a massively valuable business.