Your total addressable market (TAM) represents the total available opportunity for your product or service. Although the definition for TAM may sound simple, defining it correctly has tremendous implications for managing and growing your business. Get it right and you can:
- Create equitable and more profitable sales territories
- Align the efforts of your sales and marketing teams
- Staff your business appropriately and invest in effective tools
- Persuade investors to fund you
Get it wrong and you risk being perpetually under or over staffed, entering markets that don’t make sense, and wasting sales and marketing resources on the wrong opportunities. You also risk disappointing your investors which will limit or eliminate any additional funding you may need to effectively grow your business.
TAM Analysis: Top-Down and Bottom-Up
There are two main approaches when it comes to defining your TAM: top down and bottom up.
Top-Down TAM Analysis
Top-down TAM analysis comes in familiar reports put out by research companies such as Gartner and Forrester. This takes the form of “according to Gartner, the cloud storage market in the US is expected to grow to a $Xbn dollar market by 2022.” Traditionally, these reports are based on company surveys conducted and interpreted by analysts.
These types of top down reports can provide some quick, high level numbers to start with, but they often do not address the exact specifications of your total available market.
To get a better view into your TAM, you could also hire third-party consultants who could conduct email or phone surveys, but this approach is time-consuming, expensive and you’re still relying on educated guesses to determine just how large your opportunity is in a given market. After all, the consultants you hire can’t interview every company or guarantee a 100% survey completion rate.
With this top-down approach you might get some revenue numbers and/or a list of a few companies to include in your TAM, but a way to make those insights actionable is still missing.
Top-down is represented by an inverted pyramid that shows your company’s end user profile at the bottom. The results are presented in the form of “According to secondary research, this is a $Xbn dollar market” and shows how your company controls a percentage of that market.
Sometimes grabbing the TAM from an already published report is an easy place to start, just as long as you know it’s typically a more generic approach that lacks specific examples of value or market change.
Bottom-Up TAM Analysis
A more accurate approach to TAM analysis is bottom-up. With this solution, you’re not relying on high-level estimates. Instead, you’re digging deep into your own accounts and your own pricing model to validate the size of your market and organize the efforts of your sales and marketing teams.
At its most basic level, your TAM is the total number of accounts in your industry multiplied by the annual contract value of your product or service.
TAM = (Total # of Accounts) x (Annual Contract Value)
This means that if you have a SaaS product that has an annual contract of $20,000 per year and there are approximately 100,000 accounts who could be served by your product, your TAM would be $2 billion.
While this solution can provide a more accurate representation of your TAM, your final number is only as good as the data you have in your system. For instance, if you do business worldwide, but the TAM accounts in your CRM only represent North America, you’re not going to be able to calculate a global TAM number.
Also, in this example, we are assuming the accounts you have in your system have the budget to purchase your solution. However, what if you actually knew what the accounts in your system were already spending on your category of product? For our customers, knowing this information gives them a more in-depth understanding of what their true TAM is and whether or not they can expand it by upselling, cross-selling or offering more value added services.
For example, let’s say you are an enterprise cloud storage provider and you know that your basic solution sells for $1 million per year. You also know that the accounts in your TAM are spending $5,000,000 on cloud storage solutions. In a basic TAM analysis, you would simply multiply the $1 million contract by the number of accounts available. However, by having the additional budget spend information, you know that the cost of your solution is only 20% of what they are currently spending. This means you have the opportunity to offer a more enhanced solution at a higher price point, which would also increase your TAM.
For our customers, it’s comprehensive and detailed account information, plus budget spend intelligence for their category of product, that truly gives them confidence in their bottom-up TAM analysis.
Making Your TAM Actionable
While bottom-up is generally a more accurate approach to TAM analysis, making the data behind those numbers actionable for your sales and marketing teams is where it really gets interesting. There are many systems that can break the accounts that make up your TAM into:
- Size (small, medium, large)
This makes for a good start, but you can get much deeper by providing your teams with comprehensive technology intelligence on all the accounts in your TAM. For example, if your company is a cloud storage company, you could show them which accounts:
- Use a competitive or complementary technology solution
- Have an upcoming renewal or cloud first strategy
- Are currently spending at least $50M on cloud storage
Remember, your marketing and sales teams have limited resources. As a company, you must be able to focus their efforts on the accounts that have the potential to drive the most revenue for your company the fastest. When you can provide your sales and marketing teams with the tech intelligence behind the accounts in your TAM, you give them the insights they need to:
- Optimize sales territories
- Score and prioritize the right accounts to pursue
- Reach out with relevant outbound initiatives and marketing campaigns
In addition to that, your executive team can build a business plan around a TAM that is based on quantifiable intelligence rather than best guess estimates from analysts or consultants. And your investors have the data they need to feel more comfortable about making future funding decisions.
TAM and Market Analysis Solution
HG Insights provides a comprehensive tech intelligence solution for building and expanding your TAM. We offer unprecedented views into global industries, markets, and companies, allowing you to identify the most valuable opportunities while building strategies to maximize your revenue and accelerate growth.
Learn how you can get a free demo on how to discover your true TAM today and put it into action in 2020!