Measuring the total addressable market (TAM) of a product or business opportunity gives you an early glimpse into understanding if your business can support a new strategic direction. At times, it may feel like this analysis is stale as soon as the work is completed, and it can frequently misses the significant upside of introducing a new product to a “blue ocean.” The benefit, however, is it forces you to consider the viability of your plan and what variables you need to change in your business model to scale and reach your goals.
To properly measure your TAM and evaluate it within the lens of your company, you must take into account both market data and the internal sales and marketing metrics of your company. Recently, we were analyzing a strategic opportunity at NewsCred to determine how large the market was and then dove one step deeper to define what we believed our sales team could accomplish within 12 months. This required both a high-level market analysis and applying our internal sales metrics to understand the potential market we would reach within the next 12 months.
Rather than go through the specific question we were asking ourselves, I’m going to run this analysis for content marketing in general. Please note that I dramatically altered any internal assumptions used and changed the questions we were analyzing for this article in order to preserve our trade secrets. I hope, however, that this post can help you think about ways to analyze the market opportunity of your product or strategy.
We asked ourselves several questions:
- How many customers are in our market?
- How many of those customers need our product?
- Can we segment these customers at all?
- How much money can the industry earn from these customers in 1 year?
- How much of that market can our team acquire in 1 year?
How Many Customers Are There In Your Market?
NewsCred sells its product to other businesses. According to the US Census Bureau, there are 28 million companies in the United States. The vast majority of these companies are small businesses with less than 20 employees (27 million). Due to our pricing and the demand for content marketing software, we tend to sell our product to larger companies with greater than $100 million of revenue. According to Hoovers, there are approximately 18,000 of these companies with headquarters in the United States.
How Many Of These Customers Need Your Product?
NewsCred sells content marketing software. According to a recent Content Marketing Institute survey, 67% of B2C companies and 80% of B2B companies host their own content on a blog. Based on a high-level analysis of industries, we believe that there are approximately 8,000 B2C companies and 7,500 B2B companies in the Hoover’s data set (some industries, like government and media were ruled out due to their lack of need for content marketing). With that in mind, we will assume that there are 5,500 B2C companies (67%) and 6,000 B2B companies (80%) that maintain a corporate content site.
Can You Segment Your Customer Base To Determine Price Sensitivities?
NewsCred prices its product based on several key factors. One of those is seat licenses. Typically, large enterprises require more seats than smaller businesses. Due to this differentiation, to conduct a high-level pricing exercise, we should segment the 11,500 companies that would use content marketing software based on mid-market and enterprise accounts.
Additionally, many enterprise companies have multiple brands with marketing teams that operate independently. Each of the brands in those companies represent an opportunity to upsell our product. For this exercise, I’m going to make extremely simplistic assumptions about the number of brands in each enterprise account. Once you include the enterprise brands, the total number of companies we can sell our product to increases to 6,100 enterprise brands and 9,700 mid-market brands.
How Much Will These Companies Pay For Your Product?
Just to be clear, from here on out, I’m going to drastically change the assumptions that come from NewsCred’s internal data, so keep that in mind when you think about using this data for any analysis of our business :).
If we assume mid-market companies pay $1,000 per month for our product and enterprises pay $3,000 per month, the annualized revenue opportunity in the content marketing industry would be $340 million.
How Much Of That Market Can Your Team Capture In 12 Months?
Some key assumptions for our sales team are:
- The number of salespeople in each industry vertical
- The number of brands an SDR (prospector) can meet with in a month
- The number of meetings that convert into sales opportunities
- The team’s assumed win rate on opportunities
For this example, I’m going to assume that we have 1 sales person in each enterprise and mid-market vertical, that our SDR team arranges 10 meetings per month, that 50% of our meetings convert into sales opportunities, and that we sign a contract with 75% of our opportunities. If there are fewer brands than 120 (10 meetings x 1 sales person x 12 months) in a vertical, I assume that we’ve reached all of these brands within the year and do not exceed that number of meetings in the vertical. With those assumptions along with the number of brands in our addressable market, our average price per month, and a fully ramped sales team, we should be able to close $36 million of new revenue within 12 months.
Your TAM analysis for a business gives you a sense of whether or not the market you’re approaching is large enough to grow into or if you need to build specific efficiencies into your business model to expand the market opportunity. You can run scenario analyses to see how many sales people you should put into each industry, how much you should charge to grow your market, the opportunity conversion ratio required to scale, and what would happen if your win rate were to decrease (with higher pricing or with competition). All of these variables can help you structure a framework for your business operations and understand the potential of your product.
This post originally appeared here
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