by Bill Aulet
4. Interpreting the Results
4a Consensus on estimate of annualized revenue per end user, based on the four Data Points above (a range is fine)
How did you end up at this number/range?
The final items beyond Beachhead Market TAM are the other dimensions that are important to provide more meaning to the overall number. A $10 million Beachhead Market TAM that has 99 percent profitability where you can win 100 percent market share in less than a year, which also happens to be growing at 30 percent a year, is totally different than a $10 million Beachhead Market TAM with 10 percent profitability where you will only get 10 percent market share after three years of effort and the market is shrinking each year.
This information should be collected and then added in to fill out the Top-Down TAM Analysis Summary below to give a robust sense of the economic attractiveness of market characteristics of the Beachhead Market.
Top-Down TAM Analysis Summary
1 Total # of end users in the broad market segment Source/ based on:
2 Total # of end users in the targeted subsegment of your Beachhead Market
Source/ based on:
3 Annual monetizable revenue per end user
Source/ based on:
4 Estimate of top-down TAM (line 2 times line 3)
5 Estimate of range of profitability for your product
Source/ based on:
6 Estimated Compound Annual Growth Rate (CAGR)
Source/ based on:
7 Estimated time to achieve 20 percent market share
Source/ based on:
8 Anticipated market share achieved if you are reasonably successful
Source/ based on:
What are the three top assumptions that could affect the attractiveness of the Beachhead Market for your product (besides the product itself)? 1. __________________
2. __________________
3. __________________
Based on this summary analysis, use the checklist below to assess whether your Beachhead Market is a good size:
Checklist after TAM Analysis of Beachhead Market
Yes No
1 Is the market big enough to be interesting?
2 Is it reasonable in size for us to achieve meaningful word of mouth, meaning it is not too big?
3 Is it possible to get to positive cash flow in this market in a reasonable period of time (typically three years, but it might be shorter or longer depending on the industry)? Note: This question takes into consideration the extra four factors described above.
4 Do we still feel good about this Beachhead Market as our initial market?
If the answer to any of these is no, consider carefully before you move forward. Many of the high-profile entrepreneurs who have access to significant investment capital, or have a very strong personal balance sheet themselves, can ignore #3, but I would advise you not to ignore this question otherwise. It might be the second most important question for your survival. The most important question is the last one, because if you don’t feel good about this market, you need to figure out why.
ADVANCED TOPICS: BOTTOM-UP TAM ANALYSIS
As mentioned, a bottom-up analysis is extremely powerful and gives you invaluable insights that are not generally possible through secondary research. Bottom-up analysis is also very time consuming and difficult to get information for. If you are unsure about your market or your commitment to this idea, skip this part and come back later when you are more confident about your Beachhead Market and have a deeper understanding of the market. Most plans rely on top-down analysis, and while I think it’s insufficient, it is the reality that bottom-up analysis is much, much harder to do.
The below worksheet uses a concept called “end user density” that allows you to complete a bottom-up analysis without the need to identify every single end user in a market, since that process can be prohibitively expensive in terms of time consumed.
To calculate end user density, you’ll first need some way to divide up the market into countable units. For instance, in the SensAble example in Disciplined Entrepreneurship, we sold to companies that employed industrial designers, and they defined their countable entity as overall number of employees. Their resulting “designer density” for their market was expressed as the number of designers per thousand employees.
For a consumer product, your countable unit could be population, a specific socioeconomic segment of the population, the number of people who own another product, and so on. For businesses it may be number of employees, revenue, products released each year, number of customers that company has, and the like. These units depend on your situation. Clever choice of countable unit for density will give credibility to your TAM estimate, so spend some time to optimize your choice on this unit, understanding it is still an estimate.
Once you have defined your countable unit, go to three instances of this unit and “count noses,” determining exactly how many end users are within that countable unit. Also determine how many people overall are in that countable unit.
Then, for each instance, determine what the annualized revenue per end user is, based on the unique circumstances of each instance. Do not guess; ask the people from this instance of the countable unit!
Bottom-Up TAM Analysis Worksheet
What countable unit are you using for end user density? ______________________________________
What are three instances (i.e., real, verifiable examples) of this countable unit you will be using to “count noses”?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
Instance 1=
__________
Instance 2=
__________
Instance 3=
__________
Who did you speak to in order to gather this info?
# of end users
# of people in the countable unit
Density ratio (# end users / # people in countable unit)
How representative of the whole market do you believe this instance is?
In this instance, what is your estimate of the annualized revenue per end user?
Based on the above table, what is the reasonable estimate of the end user density? ___________________
What is the reasonable estimate of the annualized revenue per end user? ___________________________
Based on the end user density, what is the reasonable estimate for the number of end users in the market? ___________________________
What is the reasonable estimate for the TAM (# end users multiplied by annualized revenue per end user)? ___________________________
Four additional factors to consider:
Estimate of range of profitability for your product: Based on: Confidence Level:
Estimated compound annual growth rate (CAGR): Based on: Confidence Level:
Estimated time to achieve 20 percent market share: Based on: Confidence Level:
Anticipated market share achieved if you are reasonably successful: Based on: Confidence Level:
Comparing your top-down and bottom-up analyses, which do you believe has more credibility? Why?
__________________________________________________________________________________________________
__________________________________________________________________________________________________
If you blend the two estimations, what is your final TAM size? What factors would make the TAM lower than you calculated? What are the factors that would drive the TAM much higher?
__________________________________________________________________________________________________
__________________________________________________________________________________________________
Notes
1 In Disciplined Entrepreneurship on page 60, I state that if “your TAM is
less than $5 million per year it is possible that your new venture has not identified a big enough Beachhead Market.” I would like to emphasize and clarify that the lower end number was a very general guideline and was in the context of the United States. You should feel free to entertain smaller markets, but think carefully if you are being ambitious enough in the long term. Many have rightfully justified smaller markets, especially outside the United States.
STEP 5
Profile the Persona for the Beachhead Market
WHAT IS STEP 5, PROFILE THE PERSONA FOR THE BEACHHEAD MARKET?
Identify one actual real end user in your Beachhead Market who best represents your End User Profile and do a detailed profile on that specific individual.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
The Persona creates great focus in your organization and serves as a touchstone for all decisions going forward.
By the Book: See pages 69–76 of Disciplined Entrepreneurship for basic knowledge on this step.
See pages 77–81 of Disciplined Entrepreneurship for examples of how different companies and teams have addressed this step.
The Persona clarifies to everyone who is the final arbiter on key decisions on the product.
PROCESS GUIDE
The Persona is very similar to the End User Profile in Step 3, except that it is for one specific individual person and is much more in depth, resulting in an even clearer picture of your target end user.
As a startup, your challenge is to motivate a brand-new team to focus on solving a customer problem/opportunity in a completely new way, and you don’t have the resources to let the team spend valuable time squabbling about which direction to go. Logical arguments based on numbers and concepts have their place, but what really pulls the team together and drives them forward is telling a story. Behavioral economists have known for decades that narratives are the most powerful way to motivate people.1 The Persona is how your startup tells the story of who your customer is and why it matters that you are solving your customer’s pain.
As such it is important that the person you choose for your Persona accurately represents your broader End User Profile from Step 3. You should not just take the first willing person or simply choose someone on your team, but rather find the person who is the best you can get. In technical terms, this person sits at the middle of the bell curve and is not an outlier.
The Persona focuses and motivates you and your team to make the right product design decisions as well as all the other decisions needed around the product (e.g., business model, pricing, distribution, messaging) for you to be successful. It takes conversations that would otherwise be abstract debates and makes them concrete, actionable questions. What would the Persona want and find most valuable?
The Persona is a very simple way to keep the focus in the right place. As I always said at my companies, “Keep the main thing the main thing.”
The downside of this approach is that no one person can fully represent your target end user in all dimensions, but starting with a focused Persona and adjusting when you think it is leading you astray from your End User Profile is better than not having focus at all. Entrepreneurs have limited resources and time, so you need to create action and a strong, unified team to fight the existing hierarchy of status quo and inertia. You can update the Persona later, especially in Step 9, Identify Your Next 10 Customers, so make your best guess now and keep the process moving because you don’t learn without action.
The Persona is the best representative of the broader target market segment in all dimensions.
A question I frequently get is whether a member of the founding team can be the Persona. Teams with members who come from the target customer group start the process with deep domain expertise, which is extremely valuable. In fact, this is often the case for many of my classes’ most successful teams. If you don’t have someone on your team with deep domain expertise in the market you are focused on and who is from the target end user group, you will have to find someone like that and add them to your team early on. When you do, you will be amazed at the insights that person provides.
On the other hand, when you go to the extreme and appoint a member of the founding team as your Persona, you don’t know if you’ve truly found the middle of the bell curve, the person who best exemplifies the target end user group. I have seen it work well, but I’ve also seen it fail spectacularly. You must be constantly vigilant to analyze whether your Persona is a valid choice, and it can be hard for people to step back and realize they are not the best representation of the broader market. The founder’s humility and the strength of the team to hold the founder Persona accountable are key in making it work. In general, I encourage you to use a Persona who is external to your company.
To create the Persona profile, see the two worksheets at the end of this chapter, the General Information on Persona and the Persona Profile for Beachhead Market, which will step you through the information you need to consider in your profile. You may find additional information becomes relevant or some of the fields on the worksheet are not relevant. Make a profile that fits your Persona.
In addition, here are some things to consider when building your Persona:
It must be a real person. I know this might feel a bit like stalking someone, but marketing researchers have been doing this for years. Keep the details within your team and this can be overcome.
Make it visual and omnipresent. Your Persona won’t motivate people if it’s a few paragraphs of text sitting on a dusty shelf. Jeff Bezos at Amazon often insists that an empty chair representing the customer be present at important meetings. What would the customer think? How does your decision create value for that person?
Specificity is good. Definitely err on the side of too much detail rather than too little, especially at first, but then remove the details that don’t add value. If the details explain the mindset of the Persona despite not being directly related to the product, those details are still valuable. However, if they’re not directly related to the product and don’t provide insight about how the Persona thinks, they are just distractions. Take them out!
It is very important to do this as a team exercise. Just getting the result and then passing it out to the rest of the team is far less effective than having the team involved as the description of the Persona is being created. If possible, have them involved as well in the discussions and observations with the Persona. The more understanding and buy-in you get from your team on the Persona, the more alignment you will have going forward as a company, and that will make all the difference.
Once you have the Persona, you will start to focus on what you can do to add value for that Persona.
GENERAL EXERCISES TO UNDERSTAND CONCEPT
See the back of the book for answers to these questions.
Which advertisement do you think will be more effective to get people to donate money? Why?
According to the World Food Programme, 795 million people in the world do not have enough food to lead a healthy, active life. The vast majority of the world’s hungry people live in developing countries, where 12.9 percent of the population is undernourished. Poor nutrition causes 3.1 million deaths in children under 5 years of age each year, roughly 100 million children in developing countries are underweight, 66 million primary school-age children attend classes hungry across the developing world, and the World Food Programme calculates that $3.2 billion is needed per year to reach all 66 million hungry school-age children. Will you donate today for this cause?
Raj Shah is 12 years old and lives in New Delhi. Here’s a picture of him and his family. He works in the mornings and evenings to support his mother, Anjali, who is unable to make enough money for her family because she has limited mobility from diabetes, and she also has to take care of her parents. Raj also has to take care of his younger sister, Tanya, who is 7 years old. Raj is trying to go school but having a very hard time because he does not have a nutritious diet, which not only mak
es him lethargic and unable to focus at school, but can seriously stunt the full development of his brain. Raj has barely eaten anything for 3 weeks now, and certainly nothing healthy, as he is just picking up scraps from what others throw out. There is a good chance that if he does not get a good meal in the next two weeks, he will suffer permanent damage to his brain and body, which will affect his ability to support his extended family. By the way, this is just the story of one child going to school hungry, but there are 66 million of them around the world. Won’t you give $50 to help children like Raj to help themselves and their families? _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________
