By Shawn McKee
Wanting to make a little extra money over summer vacation, a young girl sets up a lemonade stand in front of her house. Her proud parents and several neighbors buy a few glasses of the tasty beverage, and she’s pleased with her sales—at first.
She thinks about the potential for her stand to sell many more cups of lemonade. She wonders how a possible relocation and an investment in more ingredients will impact her revenue. So she decides to conduct some research.
Considering her geographic boundaries and the area’s demographics, she determines that her lemonade stand has tremendous growth opportunities: She’s close to a park that’s always filled with children and their parents, business people on lunch breaks, and joggers. She decides to relocate her stand to the park, and her sales explode.
This simple example shows the power of knowing your total addressable market (TAM), which is your product’s or service’s overall demand or revenue opportunity if everyone who could find value in it purchased it. In the case of our young entrepreneur, the seller’s niche is her neighborhood. Although her market is limited, where she chooses to spend her time and money still matters—and who she sells to will determine her overall message and marketing strategy. Understanding market segmentation and recognizing the opportunities therein are key to maximizing growth.
TAM Communicates Your Company’s Value—and Its Opportunities
When the founder of MetaCert—a cybersecurity software maker for businesses—pitched his company to investors, he presented a slide commonly found in pitch decks: the company’s TAM. (See Figure 1.) But this founder, Paul Walsh, did it right. Rather than claim a broad, massive market, he demonstrated:
- How his team strategically thought about their niche market (and the extent of their product-market fit)
- How they used that information to plot their product roadmap
Walsh also demonstrated that he could identify markets with legitimate potential, which brought more credibility to his pitch and, ultimately, led to successful fundraising.
Building and growing any kind of business is a challenge, but increasing market share in the B2B space can be especially arduous. To achieve sustainable growth and reduce churn, it’s critical to identify the prospects who will convert to long-term customers. Understanding your TAM is like seeing a map: Instead of blindly choosing a direction, you can intentionally choose a path and know exactly how to prepare for it. This insight can help you align your internal processes and get everyone—from product to marketing to sales—traveling in the same direction.
Knowing your TAM will uncover potential avenues for growth that you may have previously overlooked—something that will make any revenue-driven product marketing and sales team rejoice. This is especially true if you’ve already cornered a significant portion of a niche industry’s market and it feels like there’s nowhere left to expand.
At WebPT, we found ourselves facing this challenge. When the finance team came to marketing and said we needed to drum up more leads per month, we weren’t sure where there was room to grow. So, we sat down and recalculated our TAM and market share.
If you work in a niche vertical, it’s important to understand how many deals go through in the market on an annual basis so you can estimate the number of prospects whose attention you need to grab. The last thing you want is to discover you only reached 50% of the prospects who are buying; clearly, you need to do better than that.
Using TAM to Understand Your Path Forward
Of course, TAM represents your business’s ideal future; it’s highly unlikely that one business will capture an entire market. However, TAM does give you an idea of the true size of the pond—as well as where your potential growth lies and the best spots to fish. It contains essential data to help you:
- Reach the right buyers at the right time
- Demonstrate demand-potential to investors who can fund your product development and marketing budget
- Understand your true competitive landscape
- Inform your strategic decisions
- Gain an edge in the market
Devoting resources to a new product (or even adjusting its price) without knowing the TAM for that product is a risky endeavor—after all, the potential market opportunity may not be as big as you initially thought. Conversely, you might leave a lot on the table if you don’t devote enough resources to a market that has more potential than you realized.
As marketers, we’ve been conditioned to cast a wide net, but that’s no longer effective in today’s commoditized marketplace. Defining your TAM today requires more nuance and focus—and it requires your entire team to work together. The process can drive internal alignment across marketing, sales, and even customer success functions as you work in tandem to identify market potential. When the team at WebPT needed to learn more about whom we could sell to, researching this data became our natural next step.
We provide a cloud-based electronic medical record (EMR) platform to outpatient rehab therapy clinics that employ physical therapists, occupational therapists, and speech-language pathologists. In the beginning, we thought small- to medium-sized practices were the extent of our market—and we typically sold the same products to the same personas. But our TAM revealed additional segments that we could market to, and we used this new data and knowledge to confidently market to different types of customers. It also opened the door for us to better understand the differences between the various segments in our market, as well as which products best suited each.
TAM Data-Collection Efforts
How do you define and measure your TAM? Ultimately, it comes down to collecting and tabulating data. There are several ways to compile TAM data, and this is how WebPT approached it.
We started by scouring publicly available job-market data from Data USA, the U.S. Census Bureau’s American Community Survey (ACS) and Public Use Microdata Sample (PUMS), and the U.S. Bureau of Labor Statistics (BLS). Because we target rehab therapy clinics that provide different specialty treatments (e.g., physical and occupational therapy, speech therapy), we also researched the number of clinics and different facility types in our market (e.g., outpatient, hospital, home care). We also purchased reports from IBISWorld that included data such as employee counts. This data helped us calculate how many employees worked at the businesses that could potentially use our product.
We purposely triangulated data sources to validate our findings—and then weighted these data sources based on credibility, compared the results to the data we had in our CRM, and matched all of this information to the responses collected in our industry survey. Finally, Bain & Company, a global management consultancy, was commissioned to conduct a similar study that ultimately validated our findings.
To accomplish this in your vertical, start with publicly available data and couple it with industry-specific resources, like quarterly reports of public companies that operate in your targeted space. Pinpoint how many customers in your target market could potentially buy your product, then multiply those numbers by your current pricing. Once you have a snapshot of the total market, break your data into segments so you can further analyze product-market fit.
As you calculate your TAM, be wary of some common pitfalls like ignoring category potential. The most infamous example of this pitfall is when AT&T hired consulting firm McKinsey & Co. to predict the potential penetration rate of cell phones in the United States. The firm’s initial estimate of —900,000 subscribers—was significantly lower than the actual number of adult cell phone users today—approximately 246 million in the United States alone.
A similar situation occurred when analysts tried to estimate Uber’s value using data strictly from the car-for-hire market. The issue was that Uber didn’t only bring on existing taxi passengers as its customers; it also converted public transportation riders and those who previously used their own vehicles. Essentially, Uber expanded the entire car-for-hire market.
It’s also important to understand that opposite ends of a market can be quite different—which is a lesson we learned after we better defined our TAM.
A Roadmap to New Leads
With our validated TAM data in hand, we set out to breach new opportunity spaces and ended up increasing our marketing qualified leads (MQLs). What surprised us most about our research was our clear potential to continue expanding into a variety of market segments.
For example, we discovered that half of our market comprised small businesses with one to four rehab therapists. Initially, we took our eyes off of this segment because it was the “small” side of the market, but we realized its sheer volume translated into a lot of lead and revenue potential.
So, we pivoted our marketing and sales efforts to focus on the areas where we knew we could make a big impact: the larger and smaller practice segments. We also altered our marketing strategy and started creating custom messaging based on segment. Suddenly, our marketing copy was different for owners and practicing therapists than it was for C-suite executives.
We also used our TAM (specifically, the data about the volume of different buyers) to adjust how we distributed our marketing resources. And it wasn’t just our marketing and sales strategy that changed. Once we identified new opportunities at the lower end of the market, we created more affordable product packages for smaller clinics.
TAM Data Is Actionable
Discovering opportunities is the cornerstone to successfully building a business. It also should drive the business to expand, grow, and develop or alter existing products. Had we not found a fresh—and deeply informed—way to look at our market, we may have stagnated. Instead, we peeled back the layers of our TAM and used that information to increase our number of qualified leads by 30%, close 25% more deals, expand our market share by 33%, and attract a global private-equity investor.
You can put your TAM into action by:
- Including TAM data in strategy sessions: Sales, product, and marketing teams should be privy to how much of the market you currently service and who you can realistically target and attract
- Using TAM to set yourself apart: Your defined TAM can help you understand which of your competitors are serious; then you can focus on and showcase your strongest differentiators
- Identifying potential: Leverage your data to determine whether there’s a big enough market to create a new product or if it’s time to chase a new market
We achieved great results after defining our TAM, but we know better than to become complacent because TAMs are always evolving. The market is in a constant state of change, and we know the assumptions we’re working from now will—at some point—become obsolete. Keep your nose to the grindstone. Continue working to determine where the market is and where it’s going; then, adjust your strategy to meet it.