How to Understand and Calculate Your Total Addressable Market

By Falon Fatemi

Nearly all sales organizations struggle to accurately define their total addressable market (TAM) – the total annual revenue an organization can achieve with 100 percent market share. Usually, when calculating this number, sales and marketing executives take one of two approaches.

  1. Top-down approach: The overall market size is estimated, usually based on third-party analysis 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,” this approach uses primary market research and data 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 “lookalike” data that fails to capture new potential market segments.

To 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 an approach that is fundamentally different from our competitors. This approach has the following three elements.

  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 2 times 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, your TAM changes dynamically. Economic fluctuations also play a role, including mergers and acquisitions and particular budget cycles that impact purchase decisions. We believe you should “manage” your TAM in the same way you manage customer relationships. As your world changes, so does Node’s data layer: Node data is updated in real time to ensure 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 execute 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 at SalesforceData.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 fitting the identified TAM.

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

Falon Fatemi is the Founder and CEO of Node, the first people-based artificial intelligence platform revolutionizing how people and businesses discover new opportunities. At age 19, Falon was the youngest employee at Google and has since spent over a decade focused on go-to-market strategy, global expansion, and strategic partnerships at Google, YouTube, and in the startup world. You can follow her at https://www.linkedin.com/in/falon.

About Lisa

Editorial Director at SellingPower.com.
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