Sales leaders are always looking for new opportunities to grow their business. In order to find those opportunities, these leaders need to define their Total Addressable Market (TAM). TAM is the total potential revenue that a company can generate from all of its products and services in a given market. In other words, it’s the size of the pie that a company is going after.
To accurately define their TAM, sales leaders need to consider three factors:
- The size of the market: This is the total number of potential customers in a given market.
- The company’s share of the market: This is the portion of the total market that the company can realistically capture.
- The average revenue per customer: This is the average amount of revenue that the company can generate from each customer.
Let’s take a closer look at each of these factors.
Market Size
The first step in defining TAM is to determine the size of the market. Understanding the number of potential customers within your market will allow you to set realistic goals for your company’s growth, as well as scale your inbound and outbound marketing efforts appropriately.
To gauge the size of your market, you should conduct market research and talk to industry experts. Forbes recommends checking out the Bureau of Labor Statistics, as well as finding out if your industry has a formal association that compiles and tracks data on your given market.
Market Share
Once the size of the market is defined, sales leaders need to consider their company’s share of that market. This is the portion of the total market that the company can realistically capture.
To determine your market share, you’ll need to calculate your business’s total revenue for a given time period. Then, divide by your industry’s total revenue for that time period. Multiply that output by 100 to determine your current market share percentage.
There are a number of factors that can affect a company’s share of the market, such as the company’s brand, its sales and marketing strategy, and very importantly – its competitors.
For example, a company that has a strong brand and a well-established sales and marketing strategy will likely have a larger share of the market than a company in the infant stages of its development.
If you own a burgeoning soft drink company, you can’t expect to snatch Coca Cola’s 46 percent market share from them immediately. Understanding your market’s competitive landscape will help you to come up with a realistic figure for your TAM.
Average Revenue Per Customer
The last factor to consider when defining TAM is the average revenue per customer. This is the average amount of revenue that a company can generate from a single customer. There are a number of factors that can affect the average revenue per customer, including the price of the company’s products and services, the company’s sales and marketing strategy, and the company’s customer retention strategy.
For example, a company that sells high-priced products and has a strong customer retention strategy will likely have a higher average revenue per customer than a company that sells low-priced products and has a weaker customer retention strategy.
To summarize: Total Addressable Market = (size of the market) x (company’s share of the market) x (average revenue per customer)
Now that you know how to define your TAM, you can use it to help you identify new opportunities for growth. For example, if you know that the total market for your product is $1 billion and your company has a 10% share of that market, you can reasonably expect to generate $100 million in revenue from your product.
But what if you also know that your average revenue per customer is $1,000? In that case, you can reasonably expect to generate $100 million in revenue from your product by selling it to just 100,000 customers.
This example shows how understanding TAM can help sales leaders identify new opportunities for growth. By determining the size of the market, the company’s share of the market, and the average revenue per customer, sales leaders can better assess the potential for growth in their market.
Once that potential for growth has been identified, then sales leaders can begin to evaluate the most effective strategies to leverage that potential customer base.