Video Lecture: Defining and Sizing TAM in Users

Video Contents

• [0:07] Defining TAM- How broad should we go?
• [3:55] Building TAM estimates
• [7:33] Example: Sizing TAM: Pediatric Healthcare in Northern Connecticut

This is a video excerpt from a lecture that preceded an in-class exercise in a previous iteration of the course. I go through one example and then we broke out to do other examples.  As I note at the end of the video, this is an exercise that is often something someone with an MBA will find themselves asked to do.

Transcript: Defining and Sizing the Market in Users

Defining and sizing the market in users. This is answering the question: what’s our overall market potential. What’s the broad scale of who we could serve.

[0:07] Defining TAM- How broad should we go?

Sizing starts with defining. And so one of the questions that we face as we are defining a TAM for our audience is how broad should we go? And the answer to that question is not simple. It is basically having an understanding of the audience. We do different TAMs for different audiences. Across different timescales.

If we use the market for space travel. The market for space travel eventually could be every single man woman and child on the planet. It’s not right now. It probably won’t be that for generations.

But the TAM could be, for the really visionary, the really far thinking people, the people that are like, “you know what, we’re creating space travel so that we have an exit from the planet should we ever need it”, that kind of thinking says we define the problem as being able to serve every man, woman and child on the planet. You can get really, really, really large.

But realistically right now, the market is billionaires, who are willing to take six months out of their lives to practice for space travel. That’s the SAM right now, out of all the people in the world. If I’m trying to design the next three years or plan for the next three years or five years, or maybe even 10 years of space travel, my SAM is somewhere close to that. They’re not looking at that price getting down below the a hundred thousand dollar mark anytime soon. And that is pretty limiting for the compared to the broad scope everybody in the world.

Same thing’s true in every other market. Every market can be abstracted up to a very broad level. Coca Cola famously when they were pushing their brand managers to think growth said, our goal is share of stomach. We want every opportunity that we have to nourish people, healthily or not, to be something that we have the potential to serve. So the market for bodily nourishment, that was their broad market.

But obviously every brand manager, when we’re thinking about the next iteration of seltzers, into natural seltzers and hard seltzer. They think in much smaller pieces to the market than that, because that is the useful total that helps us figure out where we could grow to in the timeframe that matters to us.

So. Here are three that we could look at. The broad market for healthcare, the broad market for hydration and the broad market for entertainment, those are huge. Right?

And if you go, and you try to raise money based on … “the market for healthcare is every man, woman, and child out there, therefore you should give us a billion dollars to go build something to solve the market for health care.” You’ll get wonderful people watching your videos. You won’t get a lot of dollars. That’s inspiring, but it’s not actionable.

And so we’re trying to kind of balance that inspiring– actionable range when we size our TAM.

So if I’m trying to help Hartford Healthcare think about how they might grow their market. We might say our big TAM is going to be the market for pediatric healthcare in Northern Connecticut. Similarly the Coca-Cola’s of the world break the market, share of stomach, down into lots of pieces. And they think about, consumption opportunities inside the home and consumption opportunities outside the home. And then finally entertainment. This is a very scoped market for entertainment, the market for in-flight entertainment over the next five years.

So this is geographic focused, right? This is a little more focused on category and use case or situation and here is one that’s time-based. So a little better balance for building actionable consensus.

[3:55] Building TAM estimates

So how do you build one of those? Here’s my model about how to build TAM estimates. This is the part that people go, wait, I thought we didn’t have to actually have numbers. Or do research or, you know, prove anything. You don’t. You don’t. You do have to quantify your thinking and that’s all we’re going to try to do here.

So the first is define your timeframe and geographic range. That is a natural boundary that helps people understand the scope of the opportunity that you are asking for, and if that’s a good fit for. There are different venture capital funds that focus on really big ideas, really small ideas, really regional ideas, et cetera. We have different regulatory schemes, and political environments across different geographies. So political boundaries are a useful spot to think about segmenting out your TAM. Even if you expect to go worldwide at some point, you’re going to start in one country.

Another good reason to use geographic or political boundaries to define and scope your TAM is because then you can have access to data by political entity, by geography. In particular in the US we have great data on the number of people and how many households and how many businesses, and how fast they’re growing and some characteristics of them. This is all readily available information that we can get at a high level. So it’s pretty easy for us to get the number of people in America, the average size of households in America, the number of households at a certain income level in America. Those are all really readily accessible, a piece of information and for many other countries as well.

And then– I wish there was a better term for this, but I haven’t found one– we’re going to use critical thinking with available data. We’re going to say what data is already out there at a broad level, and how can we use the data that we have and thinking about the data that we have to think about factors would reduce TAM. Why is our market not just everybody in the United States, who’s going to be there in the next five years. And that’s what we’re going to do next.

Where data isn’t available, we’re going to use critical thinking. We’re gonna do all households in, in urban areas. There’s great data on the percentage of households that are in urban areas or not. All households that are in urban areas that care about their health. Getting that joint estimate? That data probably doesn’t exist. But we can chain a couple together to come up with that.

And there will be a case where we get down to the factors where we don’t really know the answer. There’s no existing data. That’s where you can use your own intuition, making broad order of magnitude guesses.

And the two I like to use the most are 50/ 50. It could be either. What percentage of the time do you think that people do X versus Y. Well, I don’t know. It could be either, right. That’s 50/ 50.

The other one I use is Pareto 80/20. Is it more often than not? If someone says ‘more often than not, I do this”: 80 20 just use 80/20 as a starting place.

These are kernels. These are starting points that you can use to build a model. They’re not super reliable. I pulled them out of my own head, but they’re built on my intuition about the problem. So the more that you feel confident that I understand the problem, the more you might feel confident about these numbers.

Chain them all together to get this estimate, and then supplement your estimate using broad trends, data, and guesses on needs. So that’s really hypothetical. It will become more real when we do it together. And then when you do it for your project.

[7:33] Example: Sizing TAM: Pediatric Healthcare in Northern Connecticut

So let’s do a couple exercises here. We know we want to go after pediatric healthcare in Northern Connecticut. How do we estimate how many people are in that market?

One way to do it is we start big. We say, okay, let’s start with claiming our geography, number of people live in Northern Connecticut. We can go to the census and get that number. Then we can get the average household size in the U S we can go to the census and get that number. If we divide the number of people who live in Northern Connecticut, by the average household size in the US we’ll get the number of households. These two chained together will give us the number of households.

So the next question is, okay, how many of those households have children? And we don’t know how many households in Connecticut have children. We may not be able to get that data really readily, but we can really readily get the data on percentage of households in the U S with children. The census has this.

So we chain that together, we multiply that. So number of people live in Northern Connecticut divided by the average household size in the U S gives us average households in Connecticut, multiplied by the percentage of households in the U S with children, gives us an estimate of the number of households in Connecticut with children.

Now we have, how many of those use doctors? We don’t have any data on this. What percentage of people in America use doctors? We could probably Google that and we probably get some number. The broader that you go with your question, the more people can give you aggregate estimates of the answers. And so what we’re gonna do is kind of chain those together. This is one that, you know, I don’t know. My reaction to this is, I don’t know, I do a little bit of searching, percentage of people that use doctors and the sites that I get are not particularly reliable on that stat, I’m not getting anything that I feel confident with.

And I’m faced with a choice. I can either spend the next 15 minutes looking for a piece of data on the internet to answer this question. Percentage of people who use doctors, or I can make an educated guess. I can say, you know what, um, I think more often than not. At least 80%.

At least 80%. So 80% to a hundred percent is my range. What might I know about the people in Northern Connecticut that might give me some more precision on that. And I might say, well, you know, the people that live in Northern Connecticut, their access to doctors is really high. And in the United States, doctors advertise. So we know how to reach them. We know how to find them. So I’m going to bump this number up a little higher. I’m going to say it’s 90%.

So this was, this was a 20-second thought experiment that I just did that supports my estimate of 90% of these people use doctors. And you could argue with me, we might have a debate, no, I think it’s closer to 95 or closer to 75, but probably we’re not going to go down to 50 or 20 or 10, right. 10%. We’re probably all in the kind of 80 to 100% range. And by asking just a couple of people, we could test the plausibility of that assumption. And I’ve saved myself 20 minutes of searching on the internet to do that.

I’m going to suggest you do the same thing. When you are faced with an estimate where you don’t know the answer to it, start with the 0, 20, 50, 80 100% rule. Can you, based on your own intuition, nail down is the number closer to 20% of everybody, 50% of everybody, 80% of everybody, everybody. Write down your logic. I just said, well, I think it’s, you know, because doctors are advertising, because Connecticut’s relatively wealthy, they have the opportunity to pay for doctors, you know, all this stuff … that’s why. Write it down, save it as supporting evidence for your estimate.

Last piece is average number of children in US households, that again, we can go get from the census. So if I chain all these things together, I can get a number for the number of people in the pediatric healthcare market in Northern Connecticut.

This exercise that I just ran through is one that I predict nearly every single one of you will have to do at some point in your career. And if you’re going for any sort of strategy consulting, marketing, investment banking, any sort of market prediction kinds of jobs. These kinds of questions are often job interview questions. How would you size the market for X? They’re trying to understand your thought process. Which is why we do it in this class.