This is the third article in our 12-part subscription sales series, designed to help you understand and prepare for the evolving sales landscape. This article explores the concept of a total customer market and provides you with the formulas required to measure your own market. Don’t forget to read the previous two articles in this series; a new sales strategy and customer segmentation.
Do you know your total customer market?
Developing a sales strategy requires businesses to have a comprehensive understanding of their customer base. It also requires a business to know how much of their customer base they currently sell to, how much they want to be selling to, and how big the gap is between the two.
The Total Addressable Market (TAM) concept is a simple method to help businesses develop this insight. It allows companies to size their customer base, determine their current market share and determine how much of that market share they want to pursue.
With this insight, businesses can identify the customer segments to focus on in order to achieve their target market share, and can use this intel to inform their sales strategy.
The Total Addressable Market Approach
Below is a step-by-step guide to work through the TAM concept and better understand your customer market.
Total market size: Total Addressable Market
The TAM is the total market demand for a product or service. It includes the size of the whole market, not just the size of the market you currently capture, or hope to capture. To calculate the TAM:
- Determine which customer segments have demand for the type of product or offering you sell
- Determine or estimate how many customers are in each applicable segment of this market
- Calculate or estimate the average sales revenue of an individual customer for each of the relevant segments
- Multiply the total number of customers (ii) by the average sales revenue (iii) for each applicable segment
- Add the total figures of each segment (iv) together to determine the TAM figure
Actual market size: Serviceable Available Market (SAM)
Unless a business has a monopoly, it will not capture the entire TAM. It is unlikely that a product or service will appeal to all customer segments: it may only be applicable to certain customer segments or customers in specific regions. To determine the size of the market that your specific offering will appeal to, the SAM should be calculated. To calculate the SAM:
- Define which customer segments are serviceable, i.e. the segments that align with the product or service
- Determine or estimate how many serviceable customers are in each of your customer segments. This can be as simple as estimating a percentage of the total number of customers.
- Calculate or estimate the average sales revenue of an individual customer for each of the relevant segments
- Multiply the number of serviceable customers in each segment (ii) by the average sales revenue per customer (iii) in each segment
- Add the totals of each segment (iv) together to determine your SAM figure
- By dividing the SAM by the TAM, a business can understand the percentage of the total market that is interested in their offering. If this happens to be a low percentage, a business may wish to pivot their offering to appeal to a larger market size.
Current market share: Share of Market (SOM)
The third step in the process is to determine the share of the SAM that your business realistically can or has captured: this is the SOM. The SOM can be divided by the SAM to calculate a business’ current market share. To calculate the SOM:
- Determine the percentage of your sales revenue from last year that was generated by each of your customer segments.
- Divide your total sales revenue from last year by the SAM figure from last year.
- This is your percentage share of the SAM for last year.
- Multiply that figure (ii) by your SAM for this year to find your SOM for the current year. This is your current market share.
- Multiply your SOM (iii) for the current year by the percentage of sales revenue generated by each customer segment last year (i). This is this years’ total expected sales revenue for each customer segment.
Target market share (TMS)
Your business may not have a goal to capture the entire SAM. Your goal may be to capture certain customer segments, or to have a larger market share than your competitors. It is important to clearly define and articulate your TMS as part of setting your strategy.
To calculate your TMS:
- Define your target percentage market share for each segment
- Multiply the SAM (step 2) by the target percentage for each segment (i)
- Add the total for each segment together (ii) to arrive at the TMS.
When you have determined your TMS, you can divide your SOM by your TMS to understand how far you are from your target (in percentage). You can also divide the SOM by the TMS for each customer segment to understand which segments are a priority to target when developing your sales strategy.
By working through the TAM approach, businesses can achieve greater clarity of the market in which they operate, their current position in that market, and which customer segments to focus on to achieve their goal. This information is an invaluable data point to formulate a successful sales strategy.
Contact us for more information on how we can help you measure your total customer market.
The next article in this subscription sales series provides insight into a customer-centric sales approach.
