By Jon Matheson for Product Coalition
If you’re a product manager and you’ve performed market research analysis, you’ll realise there’s no one-size-fits-all approach. Back when I worked for a software development startup, I learned this the hard way.
For as long as SaaS products have existed, product teams have been pushed to release features by clients because they see their competitors release similar capabilities. Our client at the time believed that their market was defined by going with the “feature zeitgeist” as they described it.
The client’s desire was to win more of the market, and even when our collective intuition knew better, in the pursuit of keeping the client happy, we agreed to build a case for more funding to build this feature and perform a Total Addressable Market (TAM) analysis.
I was good at finding target market statistics if I went deep enough into mountains of data, but for this project, there was little that gave me clarity. Every time I thought I was on the right path to discovering an untapped market segment, I would get there only to realise that I was looking for customer demand in the wrong place.
Reluctantly, I produced a report which included a story of a million-dollar market size to justify building the feature. We made the release deadline, but user adoption turned out to be lower than we projected. The revenue opportunity we claimed existed turned out to be an imaginary one.
As painful as that experience was, I grew to understand that instead of looking for market specifics on what has happened — we should be looking for market potential based on what is happening.
We learned that to identify a market requires identifying context — which means you have to identify how you can address the target market over a specific period of time. Understanding this distinction is what ensures that discovering a Total Addressable Market can actually lead to real sales.
Let’s discuss how to perform your own analysis and discover your Total Addressable Market (TAM). Hopefully after you read this you’ll learn how to make informed decisions and assess the potential of your new products — all helpful for determining if an initiative is worth pursuing.
“Total Addressable Market” or “TAM” is a way of calculating the potential market size and revenue for a specific product or service.
Think of it as a way to identify the total number of potential customers. In other words, it’s the size of the pie that your business could potentially slice up. Understanding TAM is crucial because it does the following:
- Provides a realistic goal to aim for: By understanding the market’s potential size, you can set more achievable goals for your business.
- Helps you assess risks and rewards: Knowing the TAM helps you evaluate the risks and rewards of entering a particular market.
- Signals room for growth: A large TAM suggests room for growth, while a small TAM may prompt a search for new markets.
TAM allows product managers to fully understand the “shape” of a specific market. To understand the market shape, you get a sense of various aspects such as the competitive landscape, number of competitors, their market shares, the total number of potential customers, and how the buyers and sellers behave within that market.
Building this level of insight from your market analysis will inform your product strategy given your estimate of the total available market, demographics, and other key data points.
Discovering your TAM can also help identify opportunities and threats, assess competitive pressures, and make informed decisions about pricing, go-to-market positioning, and product differentiation.
Once you have a grasp on your TAM, you can build your product strategy for a specific market. So how do we discover a TAM for your company’s product and ensure that it bears fruit over time?
It’s important to note that TAM is different from market share. Let’s clear up the distinction between the two.
The “market” itself is the result of what has happened.
It is defined by the current sales of the product or service and the performance of all the businesses in competition.
The “market share” is the performance percentage of that total market that your business currently controls.
In other words, it’s the size of your current slice of the pie. Compared to all the other businesses that are in competition with you, not only do they want a greater piece of the pie, but also the piece that you have.
TAM is the total “demand” within a specific market segment.
This “demand” is the potential revenue to be made within a market if all the potential customers spend money on the product or service. This “demand” is what businesses also compete for.
This is also described as “market opportunity.”
For example, if the TAM for the “rideshare” segment in transportation is £200 million and Uber has a 60% market share, Uber controls £120 million of potential revenue in that segment.
When you strive to define your TAM, here are questions you should ask:
What is the size of the overall market?
This is the first question you should ask. It’s how you get a sense of the size of your potential customer base.
What is the growth rate of the market?
By finding out the market growth rate, you get a sense of how fast the market is growing and if there’s room for your business to grow. If you learn that the market does not show potential for growth, then it means that the market will shrink, so get the answer to this question ASAP.
Who are your target customers?
Understand who your target customers are, because it will help you identify which customer segment of the market you should target. It helps to distinguish between the buyers, the users, and in light of social media, the influencers. If possible, also find out their reasons for wanting the product. These groups have different demographics, subsets and motivations so you’ll want to understand how the people in these groups contribute to your goals for conversion.
What needs do your specific product or service address?
By understanding the needs, it will help you to narrow down your target market and identify potential customers. To discover the answers are as simple as using a Jobs-to-be-done approach and uncover what the customers are trying to accomplish in their respective situations.
What are the substitutes for your product or service?
By identifying the substitutes, it will help you to evaluate the competition in the market and determine if there’s a need for your product or service.
By asking these questions, you can get a better understanding of your TAM and use it to your advantage through every stage of your business strategy.
There are three different ways to calculate your TAM: top-down approach, bottom-up approach, and value-theory approach.
Top-Down Approach
In the top-down approach, to identify the TAM you make use of market reports, industry data, and research studies. You may use industry data from Forrester or Gartner to see which of your industry subsections align with the goals and offerings of your business. You’ll also be able to identify exactly how big those subsections are.
This doesn’t come without limitations. Sometimes, the data that is generated from the industry group is not kept as up-to-date as it should be. This also may not reflect the niche elements of your market. This is where a research consulting firm comes in. They’ll be able to conduct up-to-date research that is focused on your areas of need. This will likely come with a bigger price tag, but the return on investment is often worth it.
Bottom-Up Approach
Another way to calculate your TAM is from the bottom-up. In this method, you’re basing the TAM calculation on previous sales and pricing data. You’ll first need to multiply your average sales price by the total number of your customers. This will then give you your total addressable market. HubSpot has a great example of calculating TAM with the bottom-up approach.
Value-Theory Approach
This approach is built around how much value your customers will receive from your service or product. Then, it’s about how much they are willing to pay for these services or products in the future.
No matter which method you choose, it’s important to remember that the TAM is just a starting point. In other words, it’s not the be-all and end-all of your business strategy. Rather, it’s a tool that you can use to assess your product’s potential and make better business decisions.
Once you’ve decided on the method you’re going to use to calculate your TAM, it’s time to get into the details of the TAM sizing formula.
To calculate TAM, you need to multiply the total number of potential customers by a pricing metric. For example, if you use the average revenue per customer and your product costs £100, with 10,000 potential customers, your TAM would be £1 million (10,000 x £100).
It’s important to note that the TAM sizing formula is just a starting point. Once you have your TAM, you’ll need to dig deeper to understand your product’s potential. This includes understanding your competition, your customer’s needs, and your industry.
Once you’ve calculated your TAM, it’s time to start interpreting the results. Here are a few things you should keep in mind:
A large TAM doesn’t mean your product will be successful, but it is a proxy to your revenue and market opportunity. There are many factors that go into whether or not a product is successful. This includes things like the quality of your product, your marketing strategy, and your sales process.
It’s important to understand the difference between TAM, SAM, and SOM when conducting a market analysis.
- TAM, as we’ve already covered, is the total potential market for a product or service. This includes all customers who could potentially use the product or service.
- SAM, Serviceable Available Market or Serviceable Addressable Market, is the target addressable market that is served by the services or products of a company.
- SOM, Serviceable Obtainable Market, is the percentage of SAM that can be achieved realistically.
SAM represents the portion of the market that a company can realistically target. By understanding SAM, companies can better assess their opportunities for growth and make informed decisions about their business strategies.
In order to calculate SAM, you need to first identify your TAM. Once you have done this, you can then identify the portion of TAM that your products or services can realistically reach. This will give you your SAM.
Your SAM will change over time as your products and services evolve. As such, it’s important to regularly review your SAM and make adjustments to your business strategy as needed.
SOM, on the other hand, represents the portion of the market that a company can realistically obtain. As with SAM, this allows companies to make informed decisions about where they are looking to take their business and what opportunities lie ahead for them.
When conducting a market analysis, it’s important to understand the difference between TAM, SAM, and SOM. This will help you assess the potential size of the market and set more realistic goals for your business.
Dynamic economic conditions, changes in customer behaviour, and continued advancements in technology, any or all can contribute to fail to prioritize an adequate TAM calculation.
The trick is to include strategies designed to mitigate risks, and the biggest risk of all — is to not conduct a TAM analysis at all.
If you do not prioritize a TAM analysis, here are tradeoffs you need to consider:
1. You set unrealistic goals: Without a clear understanding of the growth potential of the market, it’s easy to set goals that are either too small or too ambitious.
2. You may miss out on opportunities for growth: A TAM analysis can help you assess the risks and rewards associated with entering a particular market. By understanding the potential size of the market, you can better assess the potential rewards of entering the market.
3. Without a clear understanding of the potential size of the market. You may make decisions that lead to oversaturation or under exploitation of a market:
4. You may waste time and resources pursuing markets that are not viable: A TAM analysis can help you assess the viability of a market before investing time and resources into pursuing it.
5. You may miss out on important insights about your customers, competitors, and the market landscape: A TAM analysis can provide valuable insights into your customers, competitors, and the overall market landscape.
Having a small TAM doesn’t mean your product will fail. But, it can indicate that in the short-term, your revenue opportunity is lower, which could affect your analysis of TAM for your new business or business opportunity.
Again, there are many factors that contribute to a product’s success. So, don’t write off your product just because the TAM is small. It’s important to remember that TAM is not static. It can change over time based on things like technological advancement, changes in the economy, and more.
To make sound business decisions, you’ll need to consider other factors like your competition, your customer’s needs, and your industry. This means that you’ll need to regularly assess your TAM to ensure you have the most accurate data. Keep in mind, the TAM is just one piece of the puzzle in figuring out what is the potential market size for your product.
