Challenge of calculating TAM

Lately, I’ve been doing some calculations of total available market (TAM) for business cases / plans.  How many times have you sat through a presentation and someone says, “this market is $5B and if we capture 0.01% then we get $50M”.  Well, it’s a bunch of BS.  First, can your product or service even play in the entire market of $5B?  For instance, if you’re selling digital music players and let’s say it’s a $1B market, but that includes sporty digital music players and your product is not a sporty one.  Well then the TAM is really smaller.

OK, so if you wanted to try coming up with a TAM besides a shot in the dark although they are mostly a shot in a dark, you can start by doing some secondary market research.  I start by doing a Google search and mostly find what I need.  Now if you honestly think that your idea is a new market with no prior research done, then you can either hire a marketing research firm to do the research for you or you can do your best to think of a similar market that best describes your unique market.  Imagine if you said I’m going to come out with the next best lipstick for pigs, you can look up data for how many pigs as pets there are in the US.  Then you can see if there are any statistics on how many pig owners or exotic pet owners dress up their pets.  It’s a stretch but you get the idea.

One other thing that I do is look to see if there is a similar growth trend with another industry.  For example, some say the state of the robotics industry is similar to the state of the personal computer industry back in the day.  Based on some growth rate, you could project how big the robotics industry will be in ‘X’ years.  Lastly, the Census is your friend.  I’ve often looked at the spending habits of certain groups of people (age, sex, geography, etc) on specific categories.  It will give you an idea of how much this group of folks will spend on an item that falls into a specific category.

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