What’s addressable market anyways?

An important part of a pitch is describing your market. Audience needs to know how big of a problem you are solving; how common it is, and to what extent of population it is appealing.

“The bigger the better” you might think… well, think again! On the urge of making the opportunity look bigger, we tend to generalize the target audience; that’s a mistake.

What really matters (specially to VCs) is to know your addressable market; what portion of the entire vertical/ industry you’re addressing is really your target.

tam-sam-market

Source: Wikipedia

 

Real life example

I’ll take AgendaPet‘s pitch again as an example. As you know, AgendaPet is a pet services marketplace, so people can book the best professionals for their loved animals. Yes, we’re that cool!

In that sense, our overall market are the 1 billion pets all over the world. However, we believe AgendaPet’s focus will be on the #1 and #2 markets, US and Brazil respectively. That’s the served market. More than this, we understand our target (addressable market) will really be those people who are responsible enough to visit a veterinarian regularly; they will be the ones to whom our service will be more appealing. We could even take it one step further, and drill it down again to only the urban areas we plan to service roughly 50% of the market).

Instead of 1 billion pets we would be addressing “only” 30 million dogs and cats, or 3%. But hey, that’s still a shitload of potential customers!

Side note: if after making the math behind the addressable market you are left with an irrelevant ($) potential, well, that’s a perfect time to rethink your business.

addressable mkt

AgendaPet’s Pitch excerpt

 

Why bother all the trouble?

Well, simply put, the addressable market numbers are the only ones you should (certainly VCs will) use to make your projections; at least you should use those numbers to check what portion of overall market you plan to dominate. That will give a reality check on your predictions.

 

The fallacy of the “1% of the market”

You probably heard that before: “if we get only 1% of the market… we would be rich”.  To me, when I hear that, it triggers a mental response: “if I dated only 1% of the Victoria Secrets Angels I would definitely be a very happy man”.

The fallacy of the 1% of the market is a huge red flag in pitches. It means that you either haven’t done your homework on market analysis, or that you’re incredibly naive.

Getting to your expected market share should be a result of your business levers (conversion, CPA, investment…), not the starting point. The result could even be higher than the 1% (of the addressable market). Take Uber, as an example: if you were the entrepreneur behind it, would you have ever guessed you would reach 40% of NYC’s individual transportation market? I bet you wouldn’t.

 

To conclude, let’s all repeat out loud, in cult like unison:  “addressable market is the only market number it matters; it shows the market you’re really competing for.” Or keep thinking about 1% of Victoria Secrets Angels…

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