So, you’re ready to scale your B2B enterprise? That’s great! You are one step closer to achieving every business owner’s dream. However, you need to consider several factors before you leap.
These factors include available resources, the risks, the needs of your potential customers, and key stakeholders involved. Getting to grips with these elements will guide you toward making informed expansion decisions.
One metric that can help you make sense of these factors is your total addressable market (TAM). It enables businesses to identify their target market and determine if it is worth pursuing. It can also help you estimate potential revenue and set realistic growth targets.
In this blog post, we will discuss how you can leverage its data for your expansion efforts. But first, let’s cover the basics.
What is Total Addressable Market (TAM)?
The total addressable market, or total available market, is the estimated total revenue a product or service could generate if it captures the entire market.
That said, competition is fierce, consumers have choices, and most products or services have limitations. As a result, no one can capture 100% of the market. So, TAM is usually calculated alongside SAM (serviceable available market) and SOM (serviceable obtainable market), which takes us to the next section.
TAM vs. SAM vs. SOM
We have already established that TAM is the largest potential market for a specific product or solution. This is the best-case scenario in a perfect world where your business monopolizes the market.
But we’ve also said above that no business can corner the entire market, so we calculate the serviceable addressable market. SAM is the portion of the TAM that you can reach depending on product, geography, or demographic limitations.
SOM is the portion of the SAM you can realistically capture. It is your market share target.
Think of TAM as a big piece of pie you would love to have to yourself but can’t. SAM is a portion of that pie you can have but probably won’t be able to finish. Then, SOM is the slice of pie you can realistically eat.
Why is TAM important?
Knowing your total addressable market is crucial because it prevents you from making uninformed decisions. It does this by helping you to:
Identify growth potential
TAM is a measurable estimate of the total demand for a product or service in a specific market. You can discover opportunities for growth by evaluating the B2B market in which your business operates.
Armed with this knowledge, you can set realistic growth targets and distribute resources effectively to achieve them.
Focus your marketing efforts
Through a TAM analysis, you can prioritize your most promising market segment. Instead of focusing on every potential customer, you can tailor your marketing efforts to reach the right ones. As a result, you conserve resources and boost the efficiency of your campaigns.
Make informed decisions
TAM data helps you make data-driven decisions. This could be launching a new product, entering a new market, or optimizing pricing strategies. With TAM insights, you gain the strategic intelligence required to drive your B2B enterprise in the right direction.
Understand your ideal customer profiles (ICPs) better
TAM also gives you a deeper understanding of your ideal customer profiles. As a result, your sales reps can create a more accurate list of winnable accounts and prioritize them.
How do you calculate TAM?
To calculate TAM, multiply the average revenue per user (ARPU) by the total number of potential customers in the target market. It is represented by the formula:
TAM = ARPU × Total Number of Potential Customers.
So, if the ARPU is $50, and the total number of potential customers is 10,000, the TAM would be:
$50 × 10,000 = $500,000.
Now, this formula provides a solid starting point. But, real-world markets often present complexities that require additional approaches. As a result, analysts employ several complementary methods for calculating TAM. They are top-down, bottom-up, and value theory.
Let’s expand on each below:
Top-down
The top-down approach for calculating TAM begins with macroeconomic data and moves towards more specific market segments. This method is ideal for early-stage startups that need to identify broad market opportunities quickly and for when detailed customer-level data is unavailable.
To calculate TAM with this approach:
- Use industry reports from sources like Gartner and Forrester to determine your total market size.
- Apply a percentage representing your relevant segment.
- Multiply them
Thus, the formula is:
Total market size × Relevant Segment Percentage = TAM
For example, if the total market size for B2B software is $100 billion and your segment (e.g., project management software) represents 5% of that market, your TAM would be:
$100 billion × 5% = $5 billion
Bottom-up
Alternatively, this method uses internal data and realistic projections to build TAM from the ground up. It is suitable for companies with access to individual customer segments, sales metrics, and product usage data. The bottom-up approach allows for a more granular estimation of market size.
Below are the steps to calculate TAM using this method:
- Determine your average revenue per customer (ARPC). This can be done by analyzing sales reports and, if applicable, data from your Subscription Management System or Customer Relationship Management (CRM) system. Divide your total revenue by your number of customers.
- Estimate the total number of potential customers in your target market. Here, you can use the resources deployed in the top-down method, such as industry reports and market research data. Relevant trade associations and industry groups are also helpful sources for this information.
- Multiply these figures
As a result, the formula is:
ARPC × Total Number of Potential Customers
Suppose your average annual revenue per customer is $10,000, and you estimate 5,000 potential customers in your target market. In that case, your TAM would be:
$10,000 x 5,000 = $50 million
The bottom-up approach often yields more accurate figures because the data is generated in-house and based on real customer data.
Value theory
With the value theory, TAM is calculated based on the value provided to customers. It is an approach deployed for disruptive products or new markets where data is limited or non-existent.
Here is how to calculate TAM with the value theory:
- Determine the willingness of customers to pay for the value your product brings them. Use research methods like A/B testing, surveys, competitive analysis, and consult industry experts.
- Estimate your potential target market using the resources suggested in the top-down and bottom-up approach. That is industry reports, market research, and government data.
- Multiply them
It is represented by the formula:
Value Per Customer × Total Number of Potential Customers
For instance, if your product saves accounting firms $20,000 annually and there are 50,000 potential firms, your TAM would be:
$20,000 x 50,000 = $1 billion
Now you know how to calculate TAM. But how can you make sense of this data to scale your business? That is what we cover in the next section.
How to leverage TAM for your B2B business expansion
Here are tips for leveraging TAM data to expand your B2B enterprise:
1. Understand your target market
This is the most crucial step in maximizing TAM data. It allows you to explore the full potential pool of customers and their spending capacity so you can set realistic revenue targets and allocate resources effectively.
For instance, suppose your target market consists mainly of entrepreneurs. In this case, you can be realistic about how much they will spend on your product or service.
2. Segment your market
Not all business owners are created equal. Some have been in business for years and turn a good profit. Others are doing okay, and there are some still figuring things out.
Identifying subgroups within the larger entrepreneur TAM lets you customize your solution for each group. So, you may offer different pricing tiers or feature sets tailored to each segment’s budget, resulting in a boost in sales and increased customer satisfaction and retention.
3. Design tailored marketing campaigns
As you divide your TAM into smaller groups, you learn more about them. This knowledge enables you to craft marketing messages that resonate with them, enhancing your lead generation B2B efforts.
For example, by knowing the size and characteristics of your market, you understand that newbie entrepreneurs will likely not buy immediately. As a result, you create a lead magnet like a free e-book or webinar to nurture them through the sales funnel.
Meanwhile, you can target more established businesses with direct product demonstrations or a free trial.
4. Influence product development
You can also leverage TAM to make informed decisions about product development and innovation. With a clear picture of your target market, you can identify underserved portions.
This then guides you in developing products or services that address these needs. Combining TAM with a resource like a sales intelligence solution can be even more effective in helping sales teams make key decisions.
With this tool, your sales team can also track competitors, analyze market trends, and uncover new leads. This enables your business to remain competitive as it expands into different TAM segments.
5. Competitive benchmarking
Speaking of staying competitive, TAM analysis helps you to measure your market share and potential against competitors. This information lets you gauge your standing and set realistic growth targets.
Observing your competitors allows you to understand their strengths and weaknesses. While you may take inspiration from their successes, you can also identify gaps in their offerings and capitalize on those opportunities.
Then, employ prospecting tools for sales to help you identify key decision-makers and potential clients in underserved or less competitive segments.
6. Partnership and alliances
While you’re unlikely to capture the whole market, you can expand your reach through strategic partnerships and collaborations.
This could mean aligning with complementary businesses to form mutually beneficial relationships. For instance, CRM software partnering with a business VoIP phone service provider can offer a more comprehensive solution to their shared market.
7. Data-driven marketing strategies
The importance of data today cannot be overstated. Launching a campaign without it is like sailing a ship without a compass.
Data analytics gives insights into customer behavior, purchasing patterns, and preferences within your TAM. With this information, you can design more targeted and effective campaigns, ensuring your message reaches the right audience at the right time.
8. Build brand awareness and credibility
Knowing your total available market won’t make a difference if your brand isn’t well-positioned to capture it. Effective brand positioning is how you can present your unique value to your TAM.
This isn’t just about gaining visibility. It also involves establishing credibility and trust within your market. For example, by delivering high-quality products or services and offering valuable resources.
While data-driven marketing strategies are essential, securing your digital assets is just as important. Implementing SSL certificate monitoring ensures your website remains safe and reliable, which helps instill confidence as you expand your reach.
9. Market expansion strategies
Finally, TAM can guide you as you explore new market territories. Perhaps you have been in a particular market for a while, and it’s time to venture into new areas. In that case, analyzing the TAM of different geographical areas can help you identify markets with potential.
Therefore, you can make informed decisions about where to expand your domestic or international operations.
Final thoughts
Analyzing and understanding your total addressable market is more than just crunching numbers. It is a strategic effort that requires a combination of critical rigor and creative insight. Through proper TAM analysis, you guide your business toward growth, efficiency, and long-term success.
But, remember that the market is dynamic. So, you must constantly reassess your TAM when considering new product launches, entering new markets, or adjusting your business strategy. This ensures you can accommodate changes such as new market entrants and changes in consumer behavior.