How to calculate your total addressable market

by in Marketing

“I know you’re gonna put together a nice “Total Addressable Market” slide. It’s going to show us all how you’re playing in a Billion Dollar Market.  That’s great. But quickly move on.” – Jason Lemkin, renowned sales expert and SaaStr Founder

Organizations of all sizes and scope struggle to accurately define their total addressable market (TAM). When calculating TAM, the total annual revenue an organization can achieve with 100% market share, organizations tend to hinge on one of two approaches:

  1. Top-down approach: The overall market size is estimated, usually based on third-party analyst or data vendor reports. Then, the market size is systematically whittled down until only the company’s target market segments remain.
  2. Bottoms-up approach (sometimes referred to as “counting noses”): Primary market research and data is used to estimate how many end users an organization has and how much they are likely to spend.

Both approaches are limited. The top-down approach tends to result in overestimations. When companies whittle down their overall market, they fail to exclude many of the segments that don’t match their target demographic. On the other hand, the bottoms-up approach tends to result in underestimations. Calculations are almost always based on incomplete data (usually CRM data) and rely on “look-a-like” data that fails to capture new potential market segments.

In order grow and thrive, an organization must accurately define its TAM. The objective isn’t to grasp the largest possible market share, but rather to identify a suitable market that allows you to grow and become profitable. If your TAM is too large, you won’t be equipped with sufficient resources to compete.

At Node, we help our customers accurately define and calculate their TAM. To do so most effectively, we’ve adopted a fundamentally different approach from our competitors:

1. Diverse data perspective:

Using Node’s data layer that spans millions of people and companies, we help companies accurately identify their optimal set of existing customers. We also help them identify their next areas of opportunity – market segments not yet captured but that exhibit the attributes for higher deal sizes and win rates. To help our customers zero in on their TAM, we leverage diverse datasets, including commonly used technologies that correlate to larger deal sizes). Thanks to our superior data quality and coverage, Node drives 2x higher conversion rates than other data point solutions.

2. Dynamic forecasting:

Many organizations don’t appreciate the fact that their TAM is constantly in flux. As you release new products or features and open up new potential markets, you TAM changes dynamically. Economic fluctuations also play a role, including mergers and acquisition and particular budget cycles that impact purchase decisions. We believe that your TAM should be “managed” in the same way you manage customer relationships. As your world is changing, so too is Node’s data layer: Node data is updated in real-time to ensure that you are constantly in tune with your TAM.

3. Prescriptive recommendations:

 “Not only did Node give me better quality data than Data.com, it helped me identify my TAM and came with the tools for my sales team to executive effectively on it. Node acts as the intelligence layer for sales, marketing and operations driving core use cases above. – Brett Queener, President at SmartRecruiters and Former EVP Product @ Salesforce Data.com.

Once we’ve helped customers zero in on their TAM, we assist them with the tactical execution. Unlike our competitors, we focus on prescriptive recommendations rather than basic lookalike modeling. These recommendations help inform operations, sales, and marketing:

  • Operations: An understanding of TAM and the scope of the available opportunity at hand empowers operations to make informed resource decisions, including hiring strategies and technologies to deploy.
  • Sales: An understanding of TAM helps sales create frameworks for the ideal types of companies and prospects that sales wants to pursue. It informs prioritization and allows sales to more thoughtfully set quotas.
  • Marketing: An understanding of TAM helps marketing identify who to target (including key verticals, segments, and named accounts). It enables marketing to not only develop more targeted outbound strategies, but to also drive quality inbound by crafting messaging that resonates with accounts that fit the identified TAM.

Understanding your TAM is the first step towards supercharging other initiatives, including account-based marketing and account-based sales.

 

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About The Author

Rebecca Hinds
Rebecca Hinds - View more articles

Rebecca Hinds graduated from Stanford University in 2014 with a M.S. in Management Science and Engineering. In 2013, Rebecca co-founded Stratio, a semi-conductor company developing infrared sensors. The company was selected by the Kairos Society as one of the 50 most innovative student-run businesses in the world.