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"How big can this be?" for product management
Measuring value when building a product
Total Addressable Market (TAM) is not the most useful concept for product management. Answering the question “how big can this be?” yields almost nothing when effectively trying to build a product. But understanding how valuable something might become is a crucial step to succeed at product management.
Here’s an equation that helped me measure whether to tackle a problem and how valuable it could become:
𝐒𝐔𝐌 (𝐏𝐞𝐨𝐩𝐥𝐞 𝐰𝐢𝐭𝐡 𝐚 𝐏𝐫𝐨𝐛𝐥𝐞𝐦) 𝐱 (𝐖𝐢𝐥𝐥𝐢𝐧𝐠𝐧𝐞𝐬𝐬 𝐭𝐨 𝐩𝐚𝐲 𝐭𝐨 𝐬𝐨𝐥𝐯𝐞 𝐭𝐡𝐚𝐭 𝐩𝐫𝐨𝐛𝐥𝐞𝐦) 𝐱 𝐌𝐀𝐗 ( 𝐯𝐚𝐥𝐮𝐞 𝐟𝐨𝐫 𝐦𝐨𝐧𝐞𝐲 )
Now let’s break it down:
𝐒𝐔𝐌 (𝐏𝐞𝐨𝐩𝐥𝐞 𝐰𝐢𝐭𝐡 𝐚 𝐏𝐫𝐨𝐛𝐥𝐞𝐦) > PMs know that product starts with the problem. The more people with the same problem (or close variations) the more customers/users you might get. So understanding how many people suffer from the problem you’re trying to solve gives you variable #1 to understand value.
𝐖𝐢𝐥𝐥𝐢𝐧𝐠𝐧𝐞𝐬𝐬 𝐭𝐨 𝐩𝐚𝐲 𝐭𝐨 𝐬𝐨𝐥𝐯𝐞 𝐭𝐡𝐚𝐭 𝐩𝐫𝐨𝐛𝐥𝐞𝐦 > Not all problems are worth spending money to solve. You can only get a valuable market if people are willing to pay to get that problem gone. Willingness to pay correlates with where the problem sits in each person’s Maslow Pyramid. Understanding the willingness is key to know how long your battle for product market fit will be.
𝐌𝐀𝐗 ( 𝐯𝐚𝐥𝐮𝐞 𝐟𝐨𝐫 𝐦𝐨𝐧𝐞𝐲 ) > Finally, how much are people willing to pay based on the different levels of value they might get? Generally everyone is willing to spend more, or less, depending on what they get. We also know there is a ceiling on how much we would spend, even if we would get the perfect value. Knowing the MAX gets your unit economics cap.
Valuable problems have many people suffering from it, most gladly willing to pay to make it gone, and with clear benchmarks of “also do this, and I will pay more and more”.
Researching all three variables for any given problem you’re trying to solve will give you a back-of-the-napkin assessment of “how big this can be” for product management.