What is an addressable market?

This calculation is not "the market is forecasted to be $x million/billion and 1-10% of that is $x million/billion" nor does it have to be an overly precise calculation initially.

It is one that requires more emphasis on how you calculate it vs. the end result as you evaluate a market opportunity.  If you apply some rigor, you will have a better overall indicator of the size of the market and how to reach it.  In a way, it reminds me of the case questions from consulting interviews where you were asked questions like "calculate the number of plumbers in the US."

The answer is not so much the point as much as how you calculate your answer isolating out known inputs and assumptions. Your addressable market analysis can be the first step in segmenting and understanding your market with your level of analysis influencing your marketing messaging, your sales approach (direct/indirect), and what the whole solution looks like from your target market's perspective.

Let's say I want to try to size the total addressable market for CRM-based SaaS integration:

• Input:    Subscription CRM revenue is $1.4B in 2008, $1.9B in 2009, and $2.3B in 2010 (according to the folks at Forrester Research)
• Assumption:    "Subscription CRM revenue" = SaaS delivery models
• Assumption:    Average CRM customer deal size = $50k per year
• Calculated:    Today there are 28,000 subscription-based CRM customers
• Calculated:    That grows to 46,000 by 2010
• Input:    75% of SaaS will require at least 5 integrations to existing systems by 2010 (according to Gartner Group)
• Calculated:    SaaS CRM customers in need of significant integration by 2010 = 34,500
• Assumption:    Percent of SaaS CRM customers seeking to purchase a solution to this problem = 50%
• Assumption:    Average customer pays $10,000 to solve SaaS integration need

Addressable global market in 2010:  17,250 companies X $10,000 = $172.5MM

This is the revenue available to the companies competing for it in 2010 - both products and consulting services.  Your company will get some portion of this amount.

Could the assumptions be wrong?  Yes.  Can you use this basic model to run various scenarios?  Yes.  Should you refine and improve the accuracy of calculations like this as you enter and gain experience in a market?  Absolutely.

Comments

[rc helicopter reviews]

Impressive blog! -Arron

[Kolb Learning]

Thanks for the article, this should help people figure out and understand what their addressable market really is.