Business Model: TAM, Revenue Model, and Product Roadmap
Posted on 11. Nov, 2008 by admin in Business Plan
The business model is loosely comprised of your market size and revenue model. We also include the product roadmap in this discussion to show how helpful it can be to iterate through your business model numerous times. In an effort to simplify the process, we recommend starting with determining your addressable market. The TAM (Target or Total Address Market) of your business is what every investor wants when they ask, “What is your market size?”
Addressable Market (TAM)
The TAM is the upper limit for your market given 100% saturation of your product. As an example, let’s say your business is to sell shoes to senior citizens within the United States. Your market size is not the total US shoe market size. Instead, your addressable market is the number of senior citizens in the United States multiplied by your price point, adjusting for the expected lifetime of the shoes. This results in your product’s recurring annual TAM. Although in reality you will never achieve that revenue, the TAM still represents that upper limit.
More important than the TAM itself are the assumptions of how you got to that number. Investors don’t want to hear, “Our market size is $13 billion, as determined by Bob. We only need to capture 1% of that market to realize $130M in revenue.” Instead, a bottoms up approach using your addressable market with assumptions clearly spelled out will go further to build credibility with investors. Investors like to see large TAMs, but also like them to be built on strong assumptions. In addition, the growth of the target market has been known to forgive many mistakes. Shrinking markets only further challenge startups.
Revenue Model
Tailoring the revenue model for the market with an eye towards the long-term TAM will help you refine your overall business model. Focusing on small opportunities that eventually open up larger ones may be a method to increase your TAM. The fact remains that resources are scarce, risk is high, and investors don’t want you to burn through all of their money without achieving significant milestones. A revenue model that can be modified to cover some of the expenses will go a long way with investors in these difficult economic times.
Product Roadmap
Now that your Revenue Model and TAM are clearer, take a look at your product roadmap. Does it aggressively go after the “low hanging fruit” of the market with a proven revenue model? The product roadmap may even help identify revenue sources as the business model is refined.
Rinse and repeat. It works for washing your hair, and it works for refining your business model. For each cycle, seek out some mentors that have been through it already.
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