When determining your company’s growth potential, the Total Addressable Market (TAM) is a valuable measure to recognize and understand.
TAM is the total demand for a product or service across all segments, substitutes or alternatives, and distribution methods. If a company was the only provider of a product or service and there were no alternatives, it represents the entire demand is accessible to them.
In Sales for Life’s SPEAR Selling Strategy, a salesperson may be accountable for their territory by visualizing the TAM. This helps businesses easily understand where gaps and opportunities exist, and they can use Signal Intelligence to select and prioritize the most attractive prospects in their total addressable market.
The seller then proceeds to planning by developing their key-account plans which are executive blueprints for their most important accounts. Sellers would then drive engagement via traditional and modern strategies.
The seller then activates customers by using the trigger Signals they’ve developed to analyze their accounts. Before going on to the reprioritize phase, where the seller would redesign their TAM based on all of the data gathered, they should evaluate the customers’ feedback, also known as purchase intent.
Why is Total Addressable Market So Important for B2B Sellers?
Investors and enterprises must understand the revenue potential of selling their products or service in a specific market. The use of TAM allows the sales and marketing teams to formulate a plan effectively, create targets, and track progress.
To put it another way, every organization must use the total addressable market to determine the value of their product or solution. You can use it to estimate the size of the market. As a result, it assists you in seeing that there is plenty of room to make revenue and expand your organization.
Understanding your TAM gives you these five main advantages:
1. It aids in getting funding and guaranteeing revenue.
Potential investors want to know your business’s potential, so all entrepreneurs should know their total addressable market before going into an investor meeting. Knowing the TAM assists investors in calculating the entire value of a business by objectively estimating market value, penetration, rivals, and timeframe.
2. It allows for financial forecasts and projections.
Financial models and forecasts frequently use the total addressable market as a baseline. This is critical information for potential investors and current stakeholders in your business to know since it will help you prepare and budget efficiently in the short and long term.
3. It allows for more accurate employee forecasts.
You can determine headcount growth using TAM, financial predictions, and quota. As you create your benchmarks, evaluate promotions for current team members, and budget for spending, it’s critical to forecasting your potential employee demands.
4. It allows you to map out your industry region.
TAM data can also be used to disperse employees strategically across all verticals, including geography, industry, and company size. If you know a substantial amount of your TAM originates from organizations with 100 or more employees, for example, you can devote extra sales representatives to that vertical.
5. It enables you to hold the company accountable.
To estimate growth measures, businesses should look at their total addressable market. What is the state of the company? Is your TAM increasing, and is your firm expanding to keep up with the market? In an ideal world, these should be proportional, or business growth should outpace TAM increase. If it isn’t, it’s time to rethink your strategies.
When you calculate your total addressable market correctly, you’ll have a higher chance of making a sale. This is accomplished not only by recognizing the growth potential of your product or service but also by allocating the greatest amount of resources to the market segments with the greatest potential for your company.
How to Calculate Your TAM
Calculating the TAM can be challenging, especially when many of your competitors in the industry are privately held and secretive about sales numbers. This can be calculated in one of these three ways:
1. Value theory, which predicts how the price of your offering will influence buyer behavior.
The value theory approach to determining the TAM is based on a lot more speculation and assumption. Thus the results are a little murkier but still relevant.
Calculate your total addressable market using value theory by estimating your product’s value to specific consumers and determining if you can adequately acquire that value through pricing.
2. Top-down approach, which uses industry research to predict the size of the TAM
Top-down TAM assessments are frequently based on previous data from market research firms. However, to draw precise conclusions about specific markets, the larger research conducted by these companies often needs to be complemented or modified by further evaluations, such as phone or email surveys conducted by third-party consultants.
3. Bottom-up approach, which utilizes data and information from your company’s early sales
The bottom-up TAM approach will offer you more accurate data, in part because it allows you to include any significant elements from the start, such as total addressable market expansion due to your entry into the market.
You arrive at this figure by extrapolating from your current pricing and using statistics. Take that figure and multiply it by the size of your target market’s consumer base.
You can determine your target market by researching the types of clients you believe will purchase your product.
5 Things You Need to Ask Yourself
We discussed how a company might oversimplify its TAM calculation and arrive at an incorrect result. It takes a little more effort than a few phrases to get an accurate picture of your total addressable market size. Let’s look at five questions to ask yourself to guarantee that the figures you come up with are as precise as possible.
1. Who is your target market?
It’s not often that your product’s target market comprises everyone. Case in point: Even though all organizations need IT services (or whatever product you’re offering), to be successful, you need to narrow down your TAM more precisely. The only way to acquire an accurate estimate of how much that market is worth is to know exactly who will buy your product.
Remember that your TAM will be greater than your target market. Your prospect account’s organizational size and budget need to be considered, for instance. This means that they’re not in the target market, but they’re in the TAM.
2. What industries are you able to sell to?
If you have a B2B product, failing to account for all of the industries that might be interested in your offering will result in a significant underestimation of your TAM. Often, a product is created with a single sector in mind, and the makers seldom consider how much broader the appeal could be. This has a negative impact on total addressable market calculations as well as business.
3. What is the current state of competition?
This is significant for several reasons. Your total addressable market is based on the assumption that you have a monopoly. Hence it isn’t included in the calculations. Identifying who else is in the neighborhood, on the other hand, will assist you in gathering data for the computations if necessary. It’ll also help you understand how to read the TAM.
4. What are your different types of customers?
The size of the market isn’t the end of market research. You’ll also want to know who will be buying your product. What is the maximum amount they are willing to pay? What factors influence such willingness? Taking a close look at your buyer personas can provide you with a wealth of information to expand your business in these days of big data.
Depending on the formula you choose, knowing what value your target consumers place on the types of items and services you’ll be delivering can be crucial for evaluating TAM.
5. What does market growth look like over the long term?
Market growth refers to an increase in demand for a product or service on the market. It’s critical to spend some time evaluating the growth prospects of your market. Even if you can’t forecast the future, you can utilize growth trends to get a sense of where your TAM is going. Year-over-year industry sales, number of customers, and kind and size of purchases per client are some indicators you can analyze to assess your market’s growth.
Identifying your company’s TAM is the initial step in determining market revenue prospects. It also has ancillary benefits, such as:
- Defining your product’s evolution and roadmap
- Evaluating a product’s market fit
- Attracting potential investors
- Keeping you updated with your competitors
Your sales and marketing teams have a significant impact on the growth of target accounts. Accurately defining the TAM boosts your sales opportunities, but it will also allow these teams to work together to produce income.
Here at PipelineSignals, we don’t just monitor your existing and target accounts for sales opportunities and identify risk. We also map out your Total Addressable Market, making sure you’re not missing out on any opportunities for sales and pipeline creation and growth.