[O]ur users clearly thought of us as an open-source developer tools company, because that’s what we really were. Which turned out to be very unfortunate, because the open-source developer tools market is one of the worst markets one could possibly end up in. Thousands of people used RethinkDB, often in business contexts, but most were willing to pay less for the lifetime of usage than the price of a single Starbucks coffee (which is to say, they weren’t willing to pay anything at all). Link
How big is the pie?
Any company selling developers tools needs to figure out the overall market size for what they’re selling. Developers, eager to work tools for themselves (typically, in their mid to late 20s developers work on at least one “framework” project) often fall prey to picking a market that has little to no money and, then, are dismayed when “there’s no money in it.”
What we’re looking for here is a market category and a way of finding how much money is being spent in it. As a business, you want grab as much as the money as possible. The first thing you want to do is make sure there’s enough money for you to care. If you’re operating in a market that has only $25m of total, global spend, it’s probably not worth your while, for example.
Defining your market category, too, is important to find out who your users and buyers are. But, let’s look at TAM-think: finding what the big pie of cash looks like, your Total Addressable Market.
The TAMs on the buffett
If you’re working on developer oriented tech, there are a few key TAMs:
- The database TAM, which is huge: around $35.9bn in 2015, which grew $2.8bn y/y. (It’s slightly different in Gartner’s official mega TAM pivot table of awesomeness, but just by a few billion.)
- Application development, $9.01bn in 2016, by Gartner – all the tools used to create software, ALM, etc. Atlassian and CI/CD tools go here, but also IDEs.
- Application infrastructure and middleware, $25.4bn in 2016, by Gartner – this is the stuff used to run all that software developers create (but not the systems management tools used to monitor it, nor OSes and IaaS type stuff that it runs atop).
Another interesting TAM for startups in the developer space is a combo one Gartner put out recently put together that shows public and private PaaS, along with “traditional” application platforms: $7.8bn in 2015. 451 has a similar TAM that combines public and private cloud at around $10bn in 2020.
I tried to come up with a public and private PaaS TAM – a very, very loose one – last year and sauntered up to something like $20 to $25bn over the next 5-10 years.
There are other TAMs, to be sure, but those are good ones to start with.
Bending a TAM to your will, and future price changes
In each case, you have to be very, very careful because of open source and public cloud. Open source means there’s less to sell upfront and, that, likely, you’ll have a hard time suddenly going from charging $0 to $1,000’s per unit (a unit is whatever a “seat” or “server” is: you need something to count by!). If you’re delivering your stuff over the public cloud, similar pricing problems arise: people expect it to be really cheap an are, in fact, shocked when it adds up to a high monthly bill.
But briefly: people expect infrastructure software to be free now-a-days. (Not so much applications, which have held onto the notion that they should be paid for: buy the low prices in the app store depress their unit prices too.)
In both cases (open source and public cloud delivery), you’re likely talking a drastically lower unit price. If you don’t increase the overall volume of sales, you’ll whack down your TAM right quick.
So, you have to be really, really careful when using backward looking TAMs to judge what your TAM is. Part of the innovation you’re expected to be doing is in pricing, likely making it cheaper.
The effect is that your marketshare, based on “yesterday’s TAMs,” will look shocking. For example, Gartner pegged the collective revenue of NoSQL vendors (Basho, Couchbase, Datastax, MarkLogic, and MongoDB) at $364M in 2015: 1% of the overall TAM of $35.9bn! Meanwhile, the top three Hadoop vendors clocked in at $323.2M and AWS’s DB estimate was $833.6M.
Pair legacy TAMs with your own bottoms-up TAM
In my experience, the most helpful way for figuring out (really, recomputing TAMs in “real time) is to look at the revenue that vendors in that space are having and then to understand what software they’re replacing. That is, in addition to taking analyst TAMs into perspective, you should come up with your own, bottoms-up model and explain how it works.
If you’re doing IT-lead innovation, using existing (if not “legacy”!) TAMs is a bad idea. You’ll likely end up over-estimating your growth and, worse, which category of software you are and who the buyers are. Study your users and your buyers and start modeling from there, not pivot tables from the north east.
The other angle here is that if you’re “revolutionizing” a market category, it means you’re redefining it. This means there will be no TAM for many years. For example, there was no “IaaS” TAM for a long time, at some point, there was no “Java app server TAM.” In such cases, creating your own TAMs are much more useful.
Finally, once you’ve figured out how big (or small!) your pie of money is, adjust your prices accordingly. More than likely you’ll find that you’ll need to charge a higher price than you think is polite…if you want to build a sustainable, revenue-driven business rather than just a good aggregation startup to be acquired by a larger company…who’ll be left to sort out how to make money.