# of potential customers x average selling price = Total Addressable Market
Don’t know average selling price (aka ASP)? No problem. Then use economic value creation instead as an upper threshold for price.
Economic value creation is what it sounds like: amount of economic value that product crates for the customer vis-à-vis time savings, cost savings, new sales, productivity increases or whatever.
For example: Assuming the product actually works, Widget X should save the average customer $1,000/year due to feature A and boost revenue by $500/year through feature B. Ergot, the economic value of Widget X to a customer is $1,500/year.*
How much value you capture––ie the market value––of the value you create will depend on the business, but especially in the early days of fleshing out a startup idea, I find this to be a very useful proxy and upper threshold.
For back of the envelope calculations, I typically assume that I’ll be able to capture 1/2 of the value I create at the absolute maximum.
In my experience, customers are more willing to let you capture a higher proportion of new revenue (especially high margin revenue!) as opposed to cost savings. New revenue “feels” free whereas cost savings does not.
*If you’re really sophisticated, you might argue that value creation = incremental profit, but I find that most customers & business have a really hard time actually calculating incremental profit.
So much of the best advice is impossible to hear when you are first starting out. Success feels within our grasp, just a sprint or two away. We’re in too much of a hurry to listen.
Failure slows you down. The pain of failure forces you to stop. Failure creates the context where one can truly listen and absorb advice from the grizzled veterans around us. I think the technical term is humility.
If you learned this lesson the hard way, don’t worry, you are not alone.
Mark Suster had a great post recently on "What Makes an Entrepreneur" and the role of street smarts, the need for a willingness to defy social conventions and how elite education and employers can hurt entrepreneurs. I was riffing in the comments about my dream of going up against Silver Spoon Competitors and ended up explaining how we recruit engineers at SpeakerText.
As the CEO, the key thing that I've realized is that it's not enough
for me to have this mindset, but that I need to build a team that
shares the scrappy mindset. And so when I went recruiting at Columbia's
engineering job fair, I highlighted the risk involved in our recruiting
propaganda. Here's what I wrote:
SpeakerText is an early stage
venture. We have been self-financed up to now and have no plans to
raise outside capital until after we have our product in the hands of
real users…We have big plans for SpeakerText and we’re going to need
high quality people to turn these plans into a reality, but the road
ahead contains many obstacles and unknowns. The opportunity is great, but so is the risk. If thinking about this fact makes you excited (in a good way), then we want to hear from you.
you know what, even though all i had was some printouts, my table was
packed with people. I left with about 150 resumes, including some from
really unbelievable candidates. We hired the top 2 people as
freelancers and bought them iPhones as compensation. I'm talking
co-founder quality guys. Now we're prepping to bring these guys on
permanently and give them equity.
This got me thinking. All the startup blogs say that finding high quality people is so key, but they never address how to find these hidden geniuses when you've got no cash. Well, here's what I learned from all this : Startups should embrace their scrappy startup-ness and wear it like a badge of honor.
Turn the fact that you're undercapitalized and going up against huge
odds into a challenge, a sexy adventure for the brave, heroic few who
seek to join you.
A good analogy is the Marine Corps: they don't offer
you money for college or life skills or any of that bullshit. The
Marine Corps offers to kick your ass, pay you dirt, and turn you
into a fighting machine. They take what others might see as a liability
(sub-standard fringe benefits) and turn it into an asset. That's their sales pitch. And they
get better people for it.
There's a lesson here for startups: Be yourself, be scrappy and be proud. Make scrappiness sexy. Sell the adventure and you'll get exactly the right people.