In the ever-evolving landscape of business, growth is the ultimate objective. Whether it is to grow, scale, and exit, or to develop a business that affords you the lifestyle you want for years to come.
But for business owners grappling with pipeline challenges (not enough leads, not enough deals, and not enough customers), the pivotal question arises:
Is Your TAM (Total Addressable Market) large enough to support your growth goals?
If the market isn’t big enough to support your growth goals, it won’t matter how much time or money you invest in marketing or sales.
That’s when you know it’s time to look at potential expansion strategies.
First, let’s define TAM (Total Addressable Market)
Total Addressable Market (TAM) refers to the total revenue opportunity that exists within a specific market or industry for a product or service. It represents the maximum potential revenue a business could achieve if it captured 100% of its target market.
Keep in mind: most businesses do not capture 100% of the market, even those that are incredibly niche. So when you think about your TAM, it’s also important to think about how much of that market you reasonably think you can capture.
TAM is a crucial concept for businesses because it provides a realistic and comprehensive view of the market size, helping companies understand the scope of their opportunities and make informed strategic decisions.
For example: let’s say your business specializes in making socks. In 2023, the sock market in the US generated more than $2 billion, and more than 400 million pairs were sold. To generate $10 million in revenue, you need to capture 0.5% of the market. But, what if you only sell socks designed for people with 6 toes? Your TAM shrinks considerably because less than 1% of the US population is reported to have extra digits. This means the TAM for your 6-toed socks is $20 million and for you to hit your $10 million goal, you need to capture 50% of the market.
How much harder would it be to acquire 50% of the market versus a sliver?
Understanding your TAM is essential for several reasons:
- Understanding your total market size means you can set realistic goals, allocate resources effectively, and develop strategies to capture the share of the market you need to in order to reach your goals.
- TAM analysis helps in segmenting the market based on different criteria such as demographics, geography, or customer behavior – this can enable businesses to tailor products or services to specific customer needs, maximizing market share within each segment.
- TAM provides a basis for comparing a business’s market share with its competitors and can help companies identify areas where they can outperform competitors, and opportunities for differentiation.
How do you go about assessing your TAM?
1. Start by ensuring you are clear on who you are trying to target. We often refer to this as your ICP (Ideal Customer Profile). Check out our Chief Growth Officer’s LinkedIn post about how to clarify your ICP here. You’ll want to make sure you understand who they are demographically and psychographically, along with what motivates them and why they would want to buy from you (intrinsic value).
2. Perform market research to understand the total size of the market. We typically do this as a part of the market research component of our OTM Path to Growth®, leveraging market research reports, industry publications, government statistics, Google Trends, and more as needed.
3. Segment the total size of the market down based on your specific criteria. Segments could include customer needs, product preferences, price sensitivity, or geography. From here, you’ll want to leverage data to estimate the market size of the segment as best as possible.
4. Calculate a realistic penetration rate. As we mentioned above, most businesses do not capture 100% of the market, even those that are incredibly niche. Estimate the percentage of the market that your business can realistically capture. Take into consideration factors like competition, market trends, and your marketing and sales capabilities.
5. Calculate your TAM using the following equation:
TAM = TotalMarketSize × PenetrationRate
Using our sock example above, if the total market size is 400 million and your business aims to capture 1% of the market, your TAM would be 4 million.
It’s important to note that calculating TAM is an estimation and involves some level of uncertainty. Businesses should continually reassess their TAM as market conditions change and update their calculations based on new information and insights.
Additionally, businesses may choose to calculate TAM for specific products, services, or market segments to gain a more detailed understanding of their growth potential.
What happens if your TAM isn’t large enough?
Sometimes, simply trying to expand sales of your existing product in your existing market isn’t enough.
There either isn’t a large enough market for what you’re selling – or there isn’t a reasonable way to capture enough market share to reach your goals. When that is the case, it’s time to look at other growth opportunities.
Introducing the Ansoff Matrix
The following is a 2×2 matrix called the Ansoff Matrix, developed by H. Igor Ansoff, first published in the Harvard Business Review in 1957, in an article titled “Strategies for Diversification.”
Aside from market penetration, which is just expanding sales of your existing product or service in your existing market, it includes the following:
- Product Development: introducing a new product or service into your existing market
- Market Development: taking your existing product or service into an entirely new market
- Diversification: introducing an entirely new product or service into an entirely new market
How do you choose which strategy is right for you and your business?
There is no right answer to this question. Every business is different, and every business owner is different. Successful businesses come in different sizes and operate in diverse markets.
Some businesses may dominate a niche market with a relatively small customer base, while others might aim for broader market coverage.
Some businesses are chasing rabbits, and some are elephant hunting.
It’s up to you to decide what type of business you want to build.
Here are some pros and cons for each to help you determine which would best fit your business goals:
Pros: This is the lowest-risk option since it involves selling more of your existing products to more of your existing target market, and since the focus is on existing products and markets, costs may be lower compared to exploring new markets or developing new products.
Cons: If you’re reading this, your TAM (total addressable market) might be too small, and therefore, no matter how much market penetration you have, it won’t be enough to reach your goals. Additionally, in a saturated market, competition can intensify, leading to price wars and reduced profit margins.
Pros: Developing new products or services allows businesses to cater to different customer needs and preferences, potentially increasing TAM or increasing customer lifetime value. Successful product development can lead to increased revenue streams and overall business growth without straying too far from your core competencies.
Cons: Developing new products requires time, money, and expertise, with no guaranteed success. There’s also the risk that the market may not embrace the new product or service, so considerable research should be done to ensure that this is an appropriate path before developing a bunch of new products or services.
Pros: Market development involves entering new markets with existing products or services, such as expanding geographic service areas or targeting additional demographics. Since it’s your existing product or service offering, the risk is lower than developing new products or services, allowing you to leverage existing strengths and capabilities. Diversifying your market also reduces the risks associated with relying on just one market.
Cons: Entering new markets may require a deep understanding of local customs, preferences, and regulatory environments. Additionally, market development requires additional marketing investment and doesn’t take into consideration the fact that there may already be strong competition in those markets.
Pros: Diversification reduces overall risk by spreading business activities across different products and different markets, allowing businesses to lean on one sector or another as the economic climate shifts. If one industry is struggling, the company can easily shift resources to products and services serving other industries that aren’t struggling.
Cons: Diversification typically results in complex organizations, often demanding significant resources and management attention, which can strain the organization.
If you don’t already have a marketing strategy or plan, check out the OTM Path to Growth® our process that guides clients through a series of collaborative exercises to analyze your business and marketing strategy, understand your customer’s behaviors, and ultimately position your brand competitively within your industry.