Chapter 6: Your Market
Obtainable, Reachable, Realistic
serviceable obtainable market, SOM, market segmentation, TAM SAM SOM, market sizing, conservative estimates
Sizing Your Market Honestly
And how do I turn it into a product? This is: who’s going to buy it. When you go — if you’re self-financing, you have to convince yourself this is right. If you’re trying to convince someone to finance you, they’re going to hammer on this really hard.
So the total addressable market is everyone possible. Obviously you’re not going to get a hundred percent market share — very few companies do. It happens occasionally, but not often. I think the highest I ever got was about 90 percent with one product. I was pretty happy with that. Never got there again. But it wouldn’t be reasonable to write a plan on 90 percent market share — and we didn’t. I think we wrote it on maybe 60 percent, because we knew that our potential customers had other options.
So: serviceable addressable market. Now, there may be things in your product that automatically exclude some buyers. Here’s the total addressable market — maybe that’s 60 percent after your first shrink. You lose 40 percent because your product doesn’t serve that group for some reason. You may exclude them. You may not want to do business with them — we’ll talk about that in a minute. Not all of these customers might be customers you want to do business with.
Serviceable Obtainable Market
And then the serviceable obtainable market is what you can reasonably expect to get, and what you’re going to build your business plan on. Because this is what you build your revenue on. That’s where the money is. By shrinking it down — and maybe shrinking it down a little more than you think you want to — be conservative. If you do better than that, great. If you don’t, not so great, especially if you have investors. Because they’re going to say, why aren’t you hitting that? You’d rather go back to investors and say, hey, we thought it was this but it’s ten percent bigger. That’s the direction you want the surprise to go.
This is something that most entrepreneurs miss and don’t spend nearly enough time on. So do the data work — dig into the data. The good news is these days we have lots of data; the bad news is we have lots of data. You’ve got to figure out how to deal with it. Then go talk to people who know this space and have experience with it, and see if your assumptions are reasonable. You’ve got to do this early, and you’ve got to get it right. I would recommend being somewhat conservative, because this is where the money comes from.
It’s also good for you individually — if you go through the exercise and find out you’ve got like two customers who are only going to buy ten dollars’ worth, that’s not something you’re going to build a business on. So it matters for you as much as it matters for investors. There’s lots of literature on this, and it sparks a ton of debate.
I finished with a client last summer and the CFO was not happy with me at all. He didn’t agree with my serviceable obtainable market. He thought it was a whole lot bigger. He wanted it bigger because he was getting ready to pitch to venture capitalists. And I told him: no, it’s not as big as you think it is, and you’re only going to hurt yourself if you don’t think about this honestly.
Aligning Resources With Potential
The next step is serviceable obtainable market segmentation. I mentioned a minute ago that in the total addressable market there may be customers you just don’t want. Why don’t you want them? One way to think about it: here’s the revenue axis, and here’s the customer commitment axis. What you really want is high revenue and high commitment — customers who are willing to spend a lot of money with you and are committed to the product. Those are the best possible customers you can find.
But it’s not a hundred percent of customers. All customers will fall in each of these four quadrants. You want the high-revenue, high-commitment customers. Low-revenue, high-commitment is actually okay too — in fact, that mix is important because it helps you diversify your revenue. You don’t want revenue concentration. If you have a big customer and they leave, and you’ve built your business on that revenue, bad things happen: layoffs, downsizing. A balanced mix of large and small, all highly committed — those customers stick with you. It’s also costly for them to leave, especially in B-to-B, so they tend to stay as long as you keep them happy.
The high-revenue, high-commitment customers get head-hunted more — competitors will come after them constantly, offering sweet deals. So you’ve got to work to keep them happy.
Now let’s talk about the other side. Low revenue, low commitment? You don’t want those customers. You’re going to work too hard for too little.
High revenue, low commitment — I’ve been in that situation. Everybody was really excited: we were about to sign one of the biggest lenders in the country. They were going to be about 40 percent of our revenue. I think I was the only one in the room saying no, don’t do it. But there was one no against a lot of yeses, and yes won.
The money problem was: yes, they brought in a lot of money. But their demands were constant, unceasing, and unreasonable. They cost us a ton. The best thing that could have happened is they could have gone away, because we were building a business on their revenue without their commitment. That’s a scenario that plays out in a lot of startups — there’s a big celebration when you sign a big customer, but they’re not really committed, and they can move easily.
Watch out for this. You might actually pass on customers. People will ask, why are you passing on them? Because you’ve done this analysis, you know where they fall in this grid, and you know that sure, it’s a lot of money, but it’s going to be a lot of work — and it may not pay off. A lot of work, a lot of cost, just not worth it.
So this is the next step on serviceable obtainable market, and I’d say do this exercise too. To the extent you can — you can’t always put customers neatly in boxes, but try. Because it’ll save you some grief later on.
This is another place the CFO and I had an argument. I was okay arguing with CFOs — it was fun, all for the right reasons.
So take this step. What I’m telling you without telling you is: there’s a lot of effort here. These initial parts of the business plan — they’re a big deal, and a lot of work. But it’ll save you a lot of time, effort, and grief later if you put the time in now.
Okay — I mean, I like analysis work, I got to admit it. I like the data work, I like that kind of work. I’m also happy to be done with it and move on.