It’s exciting to see many startups going after big markets like transportation, food, and health. They’re much larger than the typical markets of software – IT budgets or advertising budgets. A good related read on the topic of Total Addressable Market comes from Hunter Walk. Just as important as Total Addressable Market is Frequently Addressable Market (FAM). You may be going after a big market, but the real question is the frequency in which your market buys your product. Here’s why it’s just as important and how to think about it:
Lack of frequency leaves you open to competitors stealing the customer you introduced to the market
Lets say that you get someone to download your app, use your service, and even pay for it. That’s great and the first step to building a business, but if they never come back again, they’re a one and done customer. If Uber never solved the frequency problem, they would have essentially been outsourced marketing for a competitor that did. They would have spent all of this money on educating the market on the possibility of tapping a button and hailing a car, getting ~$20 of revenue, while a competitor would have taken that same customer and leveraged them to $2000+ lifetime value. Solve the frequency of use problem, before a competitor does and leverages the marketing dollars you spent acquiring the customer.
Lack of frequency makes for a small Lifetime Value
Which would you rather have 10 million customers spending $10 once OR 3 million customers spending $10 10 times a year? The first company plays in a big market with no frequency, while the other company plays in a large yet smaller market with a large amount of frequency. If you have a large total addressable market with a small FAM, you’re likely to build a company that might not be economically stable.
Lack of frequency brings about a Groundhogs day effect on customer acquisition
After a certain period of time, a customer forgets about your app. They only have ~20 or so spaces on their home screen. A bunch of companies have sprung up around solving the problem of “re-engagement” on mobile, where a customer that hasn’t used your app is prodded into reusing it. The problem is that if you don’t frequently engage your users, you have to spend more money reacquiring them everytime. This brings about a Groundhogs day effect. This is the same problem that’s plagued the media industry for years – a user comes in through search or social, builds no loyalty, and the company has to spend more resources bringing that user back. The key to digging into this problem is doing a cohort analysis. Instead of looking at MAU or DAU. Look at how many users use the service 1, 3, 6, etc. months down the road.
Subscription is a good way to think about solving the frequency problem
The best on-demand mobile services actually look like SaaS businesses
. They have frequency built in and a typical pattern of usage. Uber and Shyp likely know how often a user is going to use the service on average. They can actually run their businesses like SaaS businesses, which are more predictable to operate and grow. Take this a step further and try to see what a subscription based version of your product might look like. Maybe you do or don’t offer it as a subscription, but building a product with the assumption that someone needs to use it everyday, points you in the right direction. Handy does a good example of this by getting users to subscribe to cleanings on a weekly or bi-weekly basis for a better price. This builds frequency AND better economies of scale.
The holy grail is having a large total addressable market that you can also make a frequently addressable market.