The abuse of “total addressable market” is the root cause of DTC’s biggest blow-ups. Here’s what they didn’t tell you about TAM, and why you should use CAM instead.
If you’ve dipped a toe into the VC world, gone to business school or worked at a strategy consultancy, you’ve probably heard of TAM: total addressable market.
This is an estimate of everyone in the world who would potentially purchase your product, or it’s the percent of the total sales in your market you think you could capture.
Two ways to think about the TAM of direct-to-consumer lingerie startups that launched around 2015. Note that these numbers are rough approximations.
- The total lingerie market in the US was appx. $6 billion in 2015, and Victoria’s Secret controlled 16.6% of that market ($1 billion). If our startup could steal 10% of that share we could make $100 million per year!
- There are 127 million women between the ages of 12 and 65 in the US (my proxy for women of bra-buying age). Each woman buys an average of 1.5 bras per year. If we could sell each bra for $45 and capture just 2% of the market, we could make $171 million per year!
The ability to develop scenarios like these (also referred to as “cowboy math”) and deliver them convincingly are the reason that management consultants get paid the big bucks.
Emphasis on “deliver them convincingly”. Real talk time: TAM is mostly bullshit. And TAM abuse is a big reason we’ve seen so many sky-high consumer startup valuations go up in smoke.
This is because, like most things dreamed up by management consultants and MBA’s, these estimates are light on the details of “how we actually get here”. I can say that because I’m an MBA.
This is where CAM comes in: Current Addressable Market. CAM is a term I invented (as far as I know) to answer the persistent question: “why isn’t our business growing”?
Current Addressable Market is the number of customers you can reach profitably at a given point in time. CAM is influenced by several factors:
- Traditional TAM concepts like the size of the audience for your product.
- Size of the audience who can afford it, AND is willing to prioritize it amongst infinite other possibilities (money and enthusiasm).
- Size of the audience who is “in market” aka in the shopping mood.
- Size of the audience who knows your brand exists.
Internal and external factors influence your brand’s CAM. Brand awareness tactics increase the number of people who know you exist. Performance marketing helps you identify who is “in market”. Societal trends influence the number of people who find your product relevant and where it sits in their list of priorities.
All of these factors influence each other and could hypothetically be modeled out the same way the Black Scholes Model is used to price options. I suspect that Facebook uses a model like this to price their advertising inventory.
But the practical takeaway is that it costs money to increase CAM, which gets you closer and closer to the value of your TAM. The reason that many DTC startups in the mid-2010’s failed to reach profitability is because they were chasing more CAM than the unit economics of their business could support.
They assumed growth would be faster and cheaper than it really was.
Foundations is a series of posts where I explain some concepts that will become recurring themes in No Best Practices.
Subscribe for 2x/monthly dispatches from the front lines of digital transformation: