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Addressable Market: Knowing where your product fits in the marketplace

If you’ve spent any time with entrepreneurs and venture capitalists you know that nearly every market estimate is measured in terms of billions of dollars. Every presentation has amazing predictions – “In a market of $3B we only need to sell X units to break even, and we’ll be profitable by week 2” … ok, maybe not quite that egregious – but still pretty embarrassing. Nearly all of the presentations made by young tech entrepreneurs leave out “marketing” entirely, totally overestimate their speed to market, adoption rates and pay no attention at all to attrition. There are exceptions obviously, but they are rare in my experience.

What is the addressable market?

A viable market fits most or all of these characteristics:

1) People already using similar/competitive products.
2) People using one of your competitors vs. doing nothing at all.
3) People willing and typically buying according to your pricing model (don’t expect people to put $5,000 on a credit card)
4) People making and spending about what you’d expect an annualized cost should be
5) People whose needs are at a level and complexity that your product can support – don’t think that a fortune 500 company is going to start using your simple budget app enterprise-wide.

If you start with the big $B number and start hacking away at it with these criteria you’ll get a better idea of what your true addressable market is. From there you’ll need to figure out how many you can sell to, for how long, and for what cost. Then and only then should you decide if it’s worth your time.

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