What is the smallest size of the addressable market

In the last episode I wrote about the technology infrastructure that is needed to ensure that your market entry is successful. If you have not read that post, I would highly recommend that you read it here.

If you have determined, that the technology infrastructure exists in the overall market, then the next step is to identify what is the minimum size of the addressable market.

So why is this important?

All the investments that you make for entering the market, have to be justified by the returns. Let’s take a hypothetical example of the overall market size of the market being $100 and the market that you can address out of that is $60. Now you won’t be able to win all the business in the addressable market. Let’s assume you want to dominate the market, then a 30% market share is generally the maximum you can get. Which means you can make upto $18/-.

If the investments that you make are more than $6-$10, over the time period to get a revenue of $18, then you may just about break even or make a profit, depending on your profit margin. If however the investment needed to pick up the $18 of revenue, is $50, over the same period of time, then you are entering a losing game.

If you go through my earlier posts, you will read about my philosophy of “Riding the Elephant” if you are a small technology services company. By riding the elephant (symbolism of a large product company), you can penetrate a larger piece of the market because the elephant will help you get there faster.

The downside in this approach is, however, that the “elephant”, may itself, not succeed in penetrating the market. If however you have made investments on the technology that the “elephant” is bringing without first figuring out the minimum addressable market then you can end up making a huge loss.

It has happened to us in quite a few instances and that is why today this forms a major portion of our evaluation criteria.

You also have to look at a holistic picture, when you are taking a business decision. Maybe this product or service that you are bringing to the market, itself does not have a large addressable market. But because of the image this technology entry will give you, you may gather customers in allied areas, who would not have come to you, otherwise. Then this decision becomes an investment decision rather than just a product line decision.

So while this is an important part of the checklist for getting into the market with a new product or service, the overall decision should be based on the direction you want the business to take.

Till next time then.

Carpe Diem!!!