by Bill Aulet
Proxy Product: What products do these end users also buy today? This information is valuable because it shows how the end users already behave, instead of how they might theoretically behave if your product were to exist. Sometimes, proxy products are complementary products. If someone owns a Lexus automobile (a high-end and expensive but high-quality car), they would likely buy an expensive but high-quality brand of tires like Michelin. Other times, proxy products demonstrate similar demographic and psychographic characteristics. If someone buys a Toyota Prius, a hybrid gas-electric car that is more expensive than Toyota’s Camry sedan, they are indicating that they are likely interested in mitigating their environmental impact and that they have enough money to act on that passion. They are likely good candidates to also own, or at least be very interested in, solar panels.
Watering Holes: Watering holes are the places where your end users congregate and exchange information. They are reliable places for information about your product to be spread by “word of mouth,” which is far more effective than advertising. They also provide some corroboration for your demographic and psychographic information because you can infer things about people by the company they keep. The forms that watering holes take can be very diverse in nature as they can be industry conferences, Saturday morning soccer fields, bars (literal watering holes), online platforms, and many others.
Day in the Life: Literally tell the story of what it is like to walk in your end user’s shoes for a typical day. In this step, since you have not yet focused on one end user you will call the Persona, the “day in the life” will be a composite—but make it a composite of multiple end users whom you have actually spent a day observing and talking with. The resulting story sets aside abstract studies and statistics and brings it all home to your team by helping them understand what happens in real life. It also reinforces and helps you refine the rest of your End User Profile.
Biggest Fears and Motivators: What keeps your end users awake at night more than anything else? What are your customers’ top priorities—their fears and motivators? I don’t mean with relation to the product you’re hoping they will buy; I mean in general. When you do your primary market research, sit with end users and make a comprehensive list of all their concerns. Then, ask them to weight their priorities by giving more points to higher priorities, with a total of 100 points across all the priorities. This exercise forces prioritization. As part of the End User Profile, you’ll want a weighted list of your end user’s top five or so priorities. Confirm this list with the end users you talk to as much as possible. This list will be extremely useful going forward.
Your primary market research from previous steps may be useful here, but you will likely need to do additional primary market research to complete your End User Profile. Don’t guess or make stereotypical judgments about what your End User Profile “should” look like in an attempt to save time. In the end, you want information about real people, because it’s real people who will use your product, not fictional characters in a marketing document.
GENERAL EXERCISES TO UNDERSTAND CONCEPT
Pick a successful product that you know well. Who do you think the target end user is for that product? Write down the demographics and psychographics, and be as specific as you can. Demographics (your guess):_____________________________________________________
Psychographics (your guess):_____________________________________________________
Now go to the product’s website, look up advertisements for the product in the media, and see if the message there is consistent with your profile. Do the end users depicted look like what you expect them to? Is the product appealing to the priorities of your profile?
Demographics (per website/ads):_____________________________________________________
Psychographics (per website/ads):_____________________________________________________
What messages, images, proxy products, and other factors give you hints as to the product’s End User Profile?
Politicians and their teams are extremely aware of “end voter” profiles. Pick two candidates who are competing directly against each other in a current or recent election, and try to define each candidate’s “base,” their core group of voters, which is analogous to a Beachhead Market. In doing so, look at the candidates’ contrasting messages and images and notice how they reassure and attract these people to the candidate.
Candidate 1: Candidate 2:
Demographics of base:
Psychographics of base:
“Proxy products”—what things do members of the base actually do in their lives that demonstrate they might be inclined to support the candidate?
What watering holes do members of the base frequent?
What is the biggest fear or motivator of their base?
WORKSHEET
END USER PROFILE FOR BEACHHEAD MARKET
Demographics (be sure to determine which are relevant for your situation, but some general categories are gender, age, income, geography, job title, education, ethnicity, marital status, political affiliations, etc.)
Psychographics (as above, this needs to be customized for your situation, but examples are aspirations, fears, motivators, hobbies, opinions, values, life priorities, personality traits, habits, etc.)
Proxy Products (what other products do these end users own and which do they value the most? Which products have the highest correlation with your target end users?)
Watering Holes (e.g., locations, associations, online platforms—and sequence them in priority and indicate intensity of each)
Day in the Life (describe a day in the life of the end user and what is going on in his or her head)
Priorities (what are your end user’s priorities, and assign a weighting to each so that it adds up to 100) __________________________________Weighting:__________
__________________________________Weighting:__________
__________________________________Weighting:__________
__________________________________Weighting:__________
__________________________________Weighting:__________
Now that you know the profile of the end user, you can assess future interactions you have with potential customers to determine whether they are actually in your End User Profile and are worth your time. If they do not fit the profile, engaging with their needs will distract you from building a great product to meet a specific customer pain. And you can now estimate how many end users exist in your market, which leads you directly to Step 4, Estimate the Total Addressable Market (TAM) for the Beachhead Market.
STEP 4
Estimate the Total Addressable Market (TAM) for the Beachhead Market
WHAT IS STEP 4, ESTIMATE THE TOTAL ADDRESSABLE MARKET (TAM) FOR THE BEACHHEAD MARKET?
Estimating the TAM is a process to estimate the total revenue you could achieve (in units of dollars per year) in your Beachhead Market if you achieved 100 percent market share.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
The TAM needs to be an appropriate size for your new venture. Too big and you won’t be able to mobilize enough resources to compete; too small and your company won’t have enough revenue to sustain itself. The exercise of calculating the TAM also increases your team’s knowledge of the market. Beyond just a simple number, your team will exit this step understanding what makes the selected Beachhead Market attractive. This understanding may be more important than your TAM size and a simple “go/no go” decision.
By the Book: See pages 57–61 of Disciplined Entrepreneurship for basic knowledge on this step.
See pages 61–67 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
PROCESS GUIDE
To calculate the TAM, you will do the following:
Estimate the number of end users in the Beachhead Market, using a combination of top-down and bottom-up analysis.
Estimate the annual revenue that each end user is worth to yo
ur company.
The TAM will be helpful in determining whether your Beachhead Market is too big or too small1, but remember that it is a general estimate. You should not present it as a precise number. It is extremely important to always show your assumptions so that others can understand your logic.
The TAM is also a good way for your team to understand the broader context of the Beachhead Market. The previous and subsequent steps are all about narrowing your focus, so this step allows you to take in the larger picture of what you are looking to achieve.
Start by estimating the number of end users in the Beachhead Market. You will use a combination of top-down analysis (based on secondary market research) and bottom-up analysis sometimes called “counting noses”—counting the number of end users one by one). Since bottom-up analysis is more difficult, I have reserved that process guide for the “Advanced” section at the end of this chapter.
In a top-down analysis, you will use the criteria from your end user profile from Step 3 to locate secondary research that helps you demonstrate how many end users exist. In particular, the criteria from the demographics, proxy products, and watering holes categories are the easiest to use for this analysis.
You are unlikely to find one secondary source that matches all your criteria. Therefore, select a few key criteria (try to simplify to four or fewer) that help you narrow down the information the secondary sources give you. For instance, how many schoolteachers own two houses? You may need to pull the number of multiple-house owners, and the number of schoolteachers, and figure out an intelligent way to combine the numbers based on other estimates. Refer to the OnDemandKorea example in Disciplined Entrepreneurship (pages 64–76) if you are unsure of where to start.
Fill out the Top-Down Estimate worksheet with your criteria and number of end users, along with an explanation of the assumptions you are making.
Next, determine how much revenue each end user is worth to you each year. This part’s tougher. Remember you’re not determining the price of your product (that starts in Step 16); you’re making a first pass estimate on the customer’s willingness and ability to pay for a solution. Don’t indicate precision that you clearly do not have, but instead focus on getting an order of magnitude.
Here are three good ways to start an estimate on the annualized revenue per end user:
What the customer currently spends. The customer is likely spending money already to try to solve the customer pain, or spends money on a product that causes the customer pain and your product would replace. You’ll want to know: How much does each product cost?
How many of each product does the customer buy for the end user?
What is the average lifetime of the product before it’s replaced? The annualized revenue is the total cost per end user of the product(s) the customer buys for the end user, divided by the lifetime. For instance, if each customer buys one automobile at $15,000 that lasts for five years, the annualized revenue is $15,000 / 5 = $3,000.
The customer’s available budget. Think about the following: When you look at the market today, how much is being spent overall to solve the problem that you are looking to solve for a typical user?
How much money does the customer have (household income, business revenue, etc.)?
What fraction of that amount could you see being allocated to solve this problem?
Comparables. Comparables are similar products or data points in different markets that you can use to bolster your TAM analysis. There will be no exact comparable, as you are doing something new, but often you can find companies that provide data points that are close enough to what you intend to do that they are very valuable. For instance, if you are creating a product whose revenue is supported by advertising, what are current advertising rates for similar demographics to your end user? Comparables require some creative thinking, but they can be extremely valuable to sanity-check your other TAM estimates. After you have come up with these various data points, triangulate against them and make a judgment call as to what you think is the appropriate range at this point. Remember, you will not get this precisely right, so the key is to spend enough time to make an informed guess at this point without investing a tremendous amount of time and effort (it is important to keep moving) and then revisit it later.
Other Important Considerations for TAM
The single number of the TAM is a simplification to give you a quick sense of the magnitude of your Beachhead Market. Before you draw a final conclusion from this number, there are some other important factors you should consider:
Profitability: How profitable is the revenue? Is it software where the profitability is essentially over 99 percent? This will make your TAM size more attractive. Or is it a commodity like energy where your profitability on the revenue could be 10 percent or even less? That makes the number much less attractive. In most businesses, your goal in the Beachhead Market is to get to positive cash flow if possible prior to expanding to adjacent markets.
Time to Conquer Market: How long will it take to succeed or fail in this market? Is it a mobile app that will likely succeed or not in six months? That is good. Or rather, is it more like a medical device or new drug where it will take years to learn your fate? That is a negative consideration.
Compound Annual Growth Rate (CAGR) of Overall Revenue: Is this a market that is just starting up and has great growth potential? That would be a positive factor. Or is it a mature market where users have set habits and the total market size is in decline? That would be a negative factor.
Anticipated Market Share: Is this a winner-take-all market driven by networking effects? That could be a positive factor if you have a strong competitive position. Or is it a market that will have many players and no player will get more than a small fraction of the market? That would be a negative factor.
There are other considerations as well (such as how much investment will be required, what is the strength of the current entrenched “competitor”—a lot of that would have also come up in the Beachhead Market selection process in Step 2), but this is sufficient to have a good dialogue with your team. While the TAM size and the other considerations are important in determining whether a Beachhead Market is well-defined enough to proceed or not, do not forget the seven factors in Step 2 that led you to choose the initial market segment you did. The size of the market is just one dimension to evaluate when determining how confident you are in your selection of Beachhead Market. You are balancing the TAM size with the odds of success and the strategic value of the market (i.e., how well this market will strengthen your Core and how well it positions you for follow-on markets).
GENERAL EXERCISES TO UNDERSTAND CONCEPT
What do you think the TAM is for toothbrushes in the United States? What assumptions did you make in calculating it?
_________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________
Now what would you estimate as the TAM in the United States for high-quality electric toothbrushes that cost $150? What assumptions did you make in calculating it? _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________
What are the biggest unknowns in your assumptions that you would need to research further? _________________________________________________________________________________________ ______________________________________________________
___________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________
WORKSHEETS
Top-Down Estimate of Number of End Users in Beachhead Market
1. One Time Charge Data Point
1a Estimation of price per unit
1b Number of units needed per end user
1c Average life of product in years
1d Annualized revenue (1a*1b)/1d (Data Point 1)
2. Budget Available Data Points
2a Current spending per end user (Data Point 2)
2b Total budget for the end user
2c What percentage of budget could go to this solution reasonably?
2d Annualize revenue (2b*2c) (Data Point 3)
3. Comparables
3a Who are the comparables for your business?
3b What are the comparable products?
3c What is the comparable converted to similar annualized revenue (Data Point 4 plus however many more you deem relevant)?
