How to figure out how many customers you will have?
Have your calculator handy
According to CMS healthcare spending was 18.3% of Gross Domestic Product (GDP) in 2021. For those keeping score that is $4.3 trillion dollars. That comes out to around $13,000 per person.
That is a lot of zeroes!
There is a reason why so many people are piling into healthcare. Those numbers are only growing at an alarming rate. The average growth of healthcare costs is said to outpace the average growth of our GDP from 2022 to 2031. The only people who are happy about this are the businesses cashing in on this growth.
I say that in jest…but it does have some truth behind it.
Before I get all the angry emails I will say that the majority of people building in healthtech are coming in with good intentions.
Starting a business is really hard. Starting a healthcare business is even harder. Overall 20% of all startups will not make it past their first year. 50% fail within 5 years and 65% fail within 10 years. There are a variety of reasons that startups fail but the number one reason is they run out of money. In the current climate of funding, investors are less forgiving. Gone are the days when you could raise 100 million dollars from a pitch deck and a killer smile.
Here is a trend of investments made in health tech. You can see a pretty big dip in investments, but the median evaluation increased by 67%. This means that even though there are fewer dollars floating around, if investors believe in you they will still give you funding. Late-stage companies are getting 75% of these investments. Meaning that you need to be operating and showing value over multiple years.
How do you stay afloat?
The rest of this is going to be a huge oversimplification, but for people like me (who are not business-oriented) it should be a good start.
Let’s start with 3 definitions.
Total Addressable Market (TAM)
Is the whole market. This is the figure that everyone throws around in their pitch decks because it is the biggest number. It gets people excited!
Serviceable Available Market (SAM)
This is the part of the market that your product is aimed at. This number is percentage of the TAM.
Serviceable Obtainable Market (SOM)
SOM is the redheaded stepchild of the three. No one talks about this number because it would be confronting their own mortality. But this might be the most important number. This is the percentage of the market that you can REALISTICALLY capture or are currently capturing.
Almost no one talks about this number. In fact, I even forgot its existence until I was writing this.
Example time
Let’s go do a simple example. You are creating a telehealth platform. You have identified that the market size is 6000 hospitals. Your product will cost $10,000 per year
TAM: 6000 x $10000 = $60 million
Now you know you can’t get every single hospital, so you will pick medium to small hospitals. So that leaves you with 3000 hospitals.
SAM: 3000x $10000 = $30 milllion
That is still a great number. But you’re a conservative person and you think to yourself we really should be going after for-profit community hospitals in urban areas.
SOM: 300 x $10000 = $3 million***
*** Just a side note SOM is usually calculated by taking your SAM and multiplying it with last year's market share (the customers you actually have)
Now you can see why people usually only report the TAM. And all these numbers are assuming that you will get 100% of the market you have identified.
Here is a little secret…
Unless you are God you will never get 100% of the market.
So now you’re grinding and you got 10 hospitals to sign up in your first year! 10 is not 3000 but Rome wasn’t built in a day. The harsh reality is that its only $100,000. You have to take into account your development costs and any other overhead you might have. I am sure you can now see why most businesses fail.
Adoption Curve
There is a concept called the adoption curve which splits your market 5 segments
Innovators (2.5%)
These are your tech nerds who love trying out the bleeding edge of technology. There are great people to identify and partner with during your pre-alpha/alpha stages because they are okay with things not working all the time. They probably run Linux at home and code using Emacs.
Early Adopters (13.5%)
These are people that you need to identify once you have a minimum viable product (MVP). They get excited looking at your roadmap and the future of your product but are looking for a more polished experience. They will also help you create future enhancements and help craft the vision of your product.
Early Majority (34%)
Jumping to this group is the hardest part of building a product. These are people who are looking for a polished experience. You need to be out of your MVP stage and give them a solid well-built product. They want some bells and whistles.
Late Majority (34%)
These are the people who see all the excitement the early majority is having but don’t want to use your product because they are waiting for specific features, or just making sure you are going to be a company for more than a couple of years.
Laggards (16%)
These are the people who just discovered Facebook and telling you about how awesome social media is because they can see their cousins ‘ kid pictures whenever they want. It takes a long time to get these people on board. Getting to them will take time.
So let’s go back to our initial example. The TAM was $60 million and SAM was $30 million. Now when we come to your SOM we are looking at 2.5% of that because you want to get the innovators first. That gives you 75 hospitals to target. This number is not close to the initial 1000 hospitals but is more REALISTIC. There is a big difference between running a company that thinks it will make $3 million versus one that will make $750,000. Also, this will give you a better idea of how to price and how many people you can bring on board.
I am not a financial person and I am pretty sure you have figured that out by now. I just wanted to give people thinking about starting a business and having zero business experience a place to start.
In the end, it’s all a numbers game.
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