Is Your Idea Really Business Viable? How To Quickly Pulse Check Business Viability

Is Your Idea Really Business Viable? How To Quickly Pulse Check Business Viability

Calculating TAM and revenue in 7 minutes

TL;DR: Here’s how to quickly vet your idea:

1. Calculate Total Addressable Market (TAM): Estimate how many people could realistically buy your product. For example, if there are 70 million fitness enthusiasts, and only 15% may pay for a fitness app — so your TAM is 10.5 million users.
2. Estimate Revenue Per User: How much will each customer pay? In this case, assume $10/month or $120/year per user.
3. Estimate Realistic Market Penetration: Expect to capture only 1–5% of your TAM. A 5% penetration might yield $63 million in annual revenue.
4. Set Realistic Expectations: New features should target market opportunities worth tens of millions, while startups or new business units should aim for hundreds of millions to billions.
5. Millions of Opportunities: If your projections seem too small, reconsider pursuing the idea. There are plenty of problems worth solving with significant upside. Always, always test your assumptions and make sure the reward matches the risk before moving forward.

Introduction

As entrepreneurs and product managers, it’s easy to get excited about a new idea. But here’s the thing: ideas are only valuable if they’re backed by solid market research and have the potential to generate significant revenue.

One of the biggest mistakes people make is assuming their idea is great without checking whether the market is big enough. If your idea doesn’t have the potential to scale into the tens or hundreds of millions of dollars, it is probably not worth the effort.

In this article, I’ll walk you through how to quickly vet your idea by calculating total addressable market (TAM) and potential revenue. You’ll also learn why major new features should target at least tens of millions in market potential, while startups and new business units should aim for hundreds of millions or even billions.

Meet FictionalCo: A Custom Fitness App

Imagine you’re the founder of FictionalCo, a startup developing a custom fitness app designed to provide personalized workout plans. You believe there’s a huge market for this product, but now it’s time to validate that belief with real numbers.

Step 1: Estimating TAM / How Many Customers You Could Have

To start, calculate the Total Addressable Market (TAM) — the total number of potential users for your product.

Refining Your Target Market

A research report shows there are 70 million fitness enthusiasts in the U.S. between the ages of 18 and 45. But not all of them will pay for an app.

Only 15% of fitness enthusiasts pay for fitness applications. So, of those 70 million people, only 10.5 million are potential paying customers.

Initial TAM = 70,000,000 x 0.15 = 10.5 million users

Step 2: How Much Will They Pay?

Now that you’ve narrowed down the potential paying users, estimate how much each user is willing to pay for your app.

Based on competitor research, customers are typically willing to pay $10 per month, or $120 per year per user.

Step 3: Calculating Total Revenue Potential

To estimate your total revenue potential:

Total Revenue = 10.5 million users x $120/year = $1.26 billion per year

This represents your total revenue opportunity if you were to capture 100% of the TAM.

Step 4: Understanding Market Penetration

Market penetration depends on competition, marketing efforts, and customer adoption rates. A reasonable range is 1–5% market penetration.

• →Cemented Markets (0–1%): If there are few competitors that have a long-term hold, expect to get less than 1% market penetration.
• →Conservative Approach (1%): If competition is high but not quite cemented, expect a modest market penetration.
• →Moderate Approach (5%): If your product is well-differentiated in a good way, 5% could be realistic.
• →Aggressive Approach (10%+): This is rare but possible in underserved or high-growth markets.

Example at 5% penetration:

Revenue = 10.5M users x 5% x $120 = $63M per year

Step 5: Aim Big — Why Market Size Matters

If your revenue projections seem too low, it’s time to reassess:

• →For New Features: Target market opportunities worth tens of millions.
• →For New Startups: The market potential should be hundreds of millions to billions.

The biggest thing we compare our ideas against is risk. New Products are riskier than new features and thus need a higher ROI.

Step 6: Putting It All Together — Is It Worth It?

Now that you’ve done the math, ask yourself: Is this worth it or can I find better opportunities?

For FictionalCo, a 5% market penetration would result in $63 million per year. That’s promising if development and marketing costs aren’t too high. But if the revenue potential is closer to 2% market penetration, it might not be worth the effort/risk. You really need to think about how you would be differentiated in this space.

If your idea doesn’t meet your criteria, don’t force it. Go back to the drawing board and find a problem worth solving with a significant upside. There are so many places in the world where you can innovate.

Conclusion: The Quick Vet Check

Before committing to any idea, run this simple vetting process:

1. Calculate the TAM: How many people could potentially buy your product?
2. Estimate Revenue Per User: How much are they willing to pay?
3. Realistic Market Penetration: What percentage of the market can you realistically capture?
4. Revenue Potential: Does the total revenue opportunity justify the effort?

For major features, aim for market opportunities worth tens of millions. For startups, target markets in the hundreds of millions or billions. The bigger the unknowns, the bigger the potential must be.

Using this method, you can focus on ideas with real market potential, giving your business the best chance of success.

P.S If this feels arbitrary, test it out. You’d be surprised how many people can’t get their startup idea to be worth more than $10 million using this method in just 10–20 minutes.

P.S.S My personal benchmark is that I don’t even think about Startup ideas with a potential Market Cap worth less than 1 billion. I really I want it closer to 2–5+ billion. The reason is that I know I can sit down and come up with at least 1–2 ideas in a week that are around this mark, and startups take so much time and effort I only even want to try on the highest potential and lowest risk (Something we can talk about later).