How to Find Your Total Addressable Market
Businesses love talking about total addressable market because it’s exciting for them to see the available opportunity for their product or service. So exciting, in fact, that they often clammer to craft specific campaigns or shift messaging around new potential markets. However, if this is done hastily or without thorough research, it can turn into a waste of time and resources.
Determine Your Ideal Customer Profile
To find your total addressable market, you first need to determine your ideal customer profile, then find look-a-likes that accurately fit the mold.
Determining which data are relevant to your total addressable market is a challenge. With so much data available on both current and prospective customers, it’s hard to distinguish the signal from the noise.
The traditional way of figuring out significant information was to look at the accessible firmographic data. Firmographic data includes basic information such as industry, location, size, and revenue. While this is useful to include in your analysis, this type of data is only the tip of the iceberg. Additional business signals that are harder to obtain, such as web savvy or social presence, may actually be better predictors of success.
Let’s pretend for a moment that you are a point of sale (POS) system looking to sell your product. Perhaps you target restaurants, because they fit your ideal customer profile. You may have performed well with them in the past, so you continue searching for other look-a-likes in the same industry. But what happens when you throw a new industry in for comparison?
On the surface, with solely the firmographic data taken into account, the mechanic appears to have a lower success rate than the restaurants. This is where most marketers end their targeting exercise and launch campaigns targeted solely at restaurants. But look at how the success rates change when you add additional business signals:
With the additional signals taken into account, the business in a new and unexpected industry has a significantly higher likelihood of success than a formerly considered look-a-like.
This example reveals that before you deeming a category unfit, make sure you are looking at the best possible predictors of success. This advanced segmentation uncovered a more effective go to market strategy than the original idea to sell to restaurants.
In this case, social media presence was more indicative of success than industry.
The restaurant segment performed well because restaurants are more likely to be socially savvy than other small business industries. This new perspective with additional business signals revealed almost as high of a success with mechanics that were on Facebook as with restaurants on Facebook.
Discover the Size of the Market Opportunity
Once an ideal customer profile is solidified, the next step is to figure out how large the market opportunity is that fits the description.
Understanding your total addressable market will help you answer 4 key questions:
- How long will my sales pipeline remain satisfied?
- What is the real size of the market?
- How many prospects can I expect?
- What is the potential revenue for a particular quarter or year?
You can think of your total addressable market as the sum of your ideal buyer profile look-a-likes.
Let’s look at two scenarios to help understand how valuable it is to understand total addressable market for a product or service.
In this first scenario below, you have a segment that has a very high success rate compared to your typical conversion rate. Here is a highly targeted segment with an impressive success rate of 85.7%:
It is clear that this segment will perform well. However, the addressable market opportunity – as shown in the number of new and open records – is small. This segment should still be used, but it will soon need expansion to provide a full sales pipeline and fuel sufficient business growth.
Below is another scenario for comparison with one signal removed to widen the net of potential businesses.
In the second scenario, you have a segment that converts at a lower success rate, but with a much larger market opportunity available to target – as shown in the number of new and open records. Even though the success rate is lower in this scenario, it still has a high success rate at 67.7% – and is well worth targeting. The sheer volume of the potential in the new and open records make up for the slightly lower success rate.
The results from the second scenario are more helpful in determining the size and scope of the total addressable market because it is scalable. Continue this analysis process with additional high performing segments that have ample market opportunity to effectively visualize your total addressable market.
Estimating the size of your market used to be a struggle that involved informed guesswork and complex calculations. Now, there are tools available to businesses that automate the total addressable market discovery and execution process. Taking advantage of these tools gives marketing and sales teams confidence that they are focusing on the right market segments and opportunities. Marketing organizations in particular need to be more strategic in their analysis because their efforts span a large scale that requires significant resources. Gaining a realistic understanding of your ideal customer profile and your total addressable market will help your entire organization become more targeted and effective.
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