all right in this video we're gonna
focus on how to evaluate the market
potential for a business idea um so
we're now gonna get into some of the
evaluative process in which we're taking
a look at different ideas that we've
generated that have the potential to
earn us some type of revenue and be
commercially viable and we know that
ideas may have differing or varying
degrees of potential and so we want a
way to evaluate the various ideas we
have in a quick but very systematic way
so that we can determine out of all the
ideas that we have which one has the
potential to be more viable so for
starters we're gonna talk through this
concept called a total addressable
market now when we're thinking about a
market when we talk about the term of a
market all we're referring to is a
collection of buyers and sellers and so
by definition markets are ultimately
transaction based and so you have a
buyer someone that has ownership of some
kind of asset most commonly money and
then you have a seller someone who has
access to a good or service and the two
parties agree to facilitate an exchange
that's kind of what is the underpinning
of market-based economies much like we
have here in the US as you have
transactions that take place between
buyers and sellers so ultimately we're
trying to do is we're trying to evaluate
the market we're trying to evaluate the
degree to which there are buyers for our
patek to our potential business idea so
ultimately we can have a viable business
so in order for us to estimate this
market there's a couple of things that
we can do to kind of determine whether
or not it is viable so the first concept
that we're going to talk about is what
we call a total addressable market
commonly referred to simply is tee-am or
total addressable market now the total
addressable market is essentially the
larger market to which any particular
buyers
for a product or service reside so this
is the entire market this is essentially
if you were to sell a product to every
single person that could possibly obtain
it this is what we call the total
addressable market now what we know is
that we never businesses never really
sell to the entire total addressable
market because we have competition and
there are varying needs within that
larger market so you have a lot of
different competitors and a lot of
different solutions so we can't
necessarily acquire everything but it's
still nice to understand what the total
addressable market would be so as an
example let's say that I'm going to open
a coffee shop and I'm trying to figure
out what my total addressable market
would be well you could argue that by
opening up a coffee shop your total
addressable market is the number of
coffee drinkers now in a particular area
this can be a very high percentage now
this doesn't mean that we're gonna
acquire all of the people within this
larger market this simply means that
this is kind of the ceiling for this
particular business idea is the number
of coffee drinkers would represent our
total addressable market likewise if we
were producing smartphones our total
addressable market would be everyone
that had a smartphone which is a lot of
people so we know that businesses though
aren't necessarily going to sell to this
wide range of people now we don't want
to base our financials on this number
because this is very unrealistic right
this is a very optimistic thing
projecting that all of these people are
gonna buy our product and we want to be
very conservative especially when we're
trying to kind of estimate what our
startup costs would be but also estimate
revenue for cash flow purposes we don't
want to paint this overly rosy picture
and then realize when it does not come
to fruition now we've overextended
ourselves and we have a number of
different problems so it's nice to know
the total addressable market but this is
not one that we really want to base a
lot of our financials off of because it
tends to be very unrealistic as far as
our ability to acquire those customers
now with
in the total addressable market we also
have a few different markets as well so
the first one here is what we call the
serviceable addressable market so I'm
gonna draw kind of a market a little
circle within this larger circle and
this is gonna represent the serviceable
addressable market which I'll abbreviate
as Sam now this is essentially the
market that we can reach this is what we
call reachable so where the total
addressable market refers to everyone
that has a potential that could be
potentially a buyer
it doesn't necessarily kind of
incorporate our ability to serve that
particular market so the serviceable
addressable market is all about the
number of people that are reachable so
in our example we're talking about a
coffee shop so we're not just dealing
with the number of coffee drinkers but
we're also dealing with number of coffee
drinkers that maybe reside within a
specific area because we know that every
single business that has a physical
location has what we call a serviceable
area and this is a very important thing
to think about if you are opening up a
brick-and-mortar location where you're
expecting customers to come to you now a
serviceable area is essentially how far
customers are willing to go to get to
you now this depends largely on the type
of product to see or products that you
sell so if you operate a very broad or
kind of general business where you sell
sandwiches for example the serviceable
area would be very narrow for that type
of business because people aren't
willing to drive as far to you because
there are a lot of competitors contrary
to that you have specialty type
businesses where they're very niche
there's not a lot of them in an area and
so the serviceable area tends to be a
lot wider so one of the things that we
want to think about within this
serviceable area market is ultimately
what's the what's the size or how far
are people willing to go to get to me
what is my serviceable area this is
going to be helpful
when we get to the point to are actually
trying to quantify the number of
customers that's directly tied to the
number of people that reside within our
physical location so we want to know
what's our serviceable addressable
market how many people can we actually
serve for a physical for a physical
business like a coffee shop or a
retailer this is hugely to deal with
proximity right the number of people
within a given area and notice that will
be a smaller subset of our total
addressable market now one of the
questions that you might be answering or
might be asking yourself is well what if
I have an online business because
technically if I have an online business
then I can sell products to anywhere so
I don't I'm not necessarily constricted
by this same kind of geographic
limitations much like a physical
brick-and-mortar business and yes and no
right simply because we can distribute
everywhere does not mean our customers
everywhere that just means that our
distribution is wider than a
brick-and-mortar business much like a
coffee shop or a physical retailer but
that does not mean that our that our
customer is everywhere instead what we
will want to think about to try to
figure out our serviceable area market
is we might want to do some research
into keywords there are a lot of really
good tools online that you can utilize
as a way to figure out how many times
people are searching for specific
keywords that might relate to my
business idea one of the tools that I
have used in the past is the Google
Keyword planner tool and this is a tool
that you can use if you have a Google
Ads account which is free to obtain and
so you register for a Google Ads account
you certainly don't have to run ads
unless you really want to but under the
kind of planning function there you can
find the keyword planner tool and it's
actually pretty intuitive you simply
enter some keywords in and then Google
will tell you how many times people have
searched for those words and then you
can fine-tune it and start looking in
specific geographic areas so if you're
an online business ultimately your
customer base isn't dependent upon your
geography but is ultimately a subset of
how many people are actually
looking for your specific keywords so
that's one thing that's helpful that
could represent maybe your serviceable
area market people that are actually
searching for you now Google Keyword
planner tool isn't the only tool you can
find a number of different ones but a
lot of them are paid for services so
just be careful of that now the next
area or the next market if you will
within this kind of diagram is what we
call the share of market now this is the
smallest piece within this total
addressable market and so we call this
the share of market commonly abbreviated
as som but its share of market and this
represents the actual percentage of the
market that we can obtain so
realistically what percentage of maybe
it's Internet traffic that is searching
for a particular keyword do you think
that we can possibly attract what
percentage of people that reside within
our serviceable area that are coffee
drinkers do you think we can get to come
into our coffee shop and so notice that
the market is getting smaller and
smaller and smaller so we're in a
specific area you might say that well
the total addressable market the number
of coffee drinkers within an area let's
say hypothetically represents 500,000
people we might say well those that
residing within our serviceable
addressable market which we say if just
hypothetically let's say is a smaller
subset of that but we believe that
people would drive upwards of 3 miles to
get to us because once you get outside
of that there are other coffee shops and
so we're expecting someone to drive by a
competitor to come to us well that may
happen we don't want to Bank on the fact
that everyone is going to do that so we
might say well in our smaller market we
actually have about 60,000 people that
reside within our serviceable
addressable market this is who is
willing to drive to us and then a
percentage of
we might say is like well realistically
we would think that we can probably
acquire maybe 10% of those customers
which we would then say we can acquire
potentially 6,000 people now that
doesn't mean that 6000 people are of
course coming into our coffee shop every
single day we would certainly have
regulars but that just means that we
believe that we can acquire 10% of the
market now that's a very quick and very
kind of dirty calculation I will show
you how to do a little bit more thorough
calculations but what's helpful to kind
of think through is these three
individual markets because when we're
not careful oftentimes we tend to focus
on well what's the market what's the
total addressable market that's
oftentimes the statistics that we rely
upon when we're doing our projections
and while that does kind of fully kind
of convey the opportunity when we are
really evaluating the business idea we
really want to think about well what is
the customer group that I can serve
because the reality is is I can't
manufacture enough products to appeal to
everyone I just there are logistical
issues there there are sourcing issues
there there are labor issues there and
then ultimately there are competitors in
the market and we need to be cognizant
of the fact that there are others that
we're gonna need to compete with and
when we enter a market we really
oftentimes don't create new customers
right generally we're kind of taking
from existing customers so as an example
let's say the serviceable area market
there's 60,000 people but there are two
coffee shops already in that area well
in theory you could say well that means
that you know we have 60,000 people so
every coffee shop currently is getting
30,000 right 60,000 divided by the two
existing coffee shops so if I go into
this market then I'm also going to get
30,000 people but the reality is is when
we enter a market that's established
we're not necessarily adding new
customers right me opening up a coffee
shop doesn't in fact educate people
about this new thing called coffee
instead what happens is I take that
existing population and now instead
dividing it by two competitors now I
divide it by three and so you can argue
that there are now 20,000 customers in
the market so ultimately we have to be
aware of what the competition is like as
well we simply can't go into a market
and there's this giant kind of bubble
that protects us and insulates us from
what's happening but the reality is is
that we are going to compete and in a
market based economy that relies a lot
on competition to the benefit of
consumers those are dynamics that we
have to be aware of so as we kind of
close this video the one thing that I
want to kind of come back to is it's
important to think about your market in
these three areas the first thing is
looking at what is the total market the
total number of people that have a
potential need for the solution that
you're solved that you're providing and
then ultimately within that what's your
serviceable addressable market what is
the the number of people that you can
realistically reach whether that's
through your physical channels whether
that's through your online distribution
and then ultimately what is the share of
the market that you can acquire how many
competitors are in this space what is
their relative size and what can what
potential share of that market can you
acquire it's not going to be an exact
science so if you're the type of person
that really wants like a hard number
it's gonna be very difficult because
there's a lot of variables but
ultimately thinking through these three
components helps us get at least in the
ballpark right we're not going to get a
hundred percent accurate but the goal is
just to get kind of close and if we can
get close then that means that at least
the projections and the assumptions and
the decisions that we're making are at
least a little bit more sound than if we
did not have access to that information
you