Business Basics – Determining your Total Addressable Market and Competition
TAM (Total Addressable Market) is one of the most important business metrics that businesses tend to completely neglect for some reason. But when it comes to understanding revenue opportunities, nothing beats TAM. Beside this, TAM offers other advantages to businesses. These range from data-driven decision making in regards to the future development of services and products to better understanding competitors in a particular niche.
The broad definition of TAM is quite clear. It states that TAM is an expression for the annual expected sales within the limits of the target market. But, determining your TAM and competition is not as simple as one may think when observing this definition. This is why we have decided to help you with this. Let’s see how you can calculate your TAM and explore your competitors.
Calculating your TAM
In order to calculate your TAM, you have to collect, analyze and take into the account data from several segments. These are the three primary methods for calculating TAM.
Top-down Approach. TThe top-down method is generally used at the start. Why? Because it helps you assess the general factors of the economy you are looking at. It has its downsides, but it can provide you with some raw data and help you make certain decisions. It puts you in a position to start from the top of an economy’s macro data set. Where to start? Take a look at reports and research papers in your niche. There are dozens of those on Gartner and Statista.
Example: Let’s take the global smartphone market as an example. Keep in mind that this is a very crude calculation. There are 2.53 smartphone users in the world. The average selling price of smartphones is $215, and people usually upgrade their phones once in two years. Let’s say that your desired margin is 20%. The TAM would be as follows:
1.87 billion people (the number of total smartphone users is cut in half, because we have assumed that users change their phone once in two years) * 1 smartphone * $215 * 120% margin * 365 days = $176,1 trillion TAM.
Bottom-Up Approach. This approach is way more accurate even though it is mathematically based on prediction, or if you prefer, forecasting. Why? Because it takes the data that the very company has collected, the data generated by its interaction with customers across the board. Since the anchor lies in the data point consisted of company filings, reports and customer surveys, the forecasting of TAM gets a new perspective.
Example: Let’s say the smartphone manufacturer from the last example wants to calculate the TAM for the current year, but only after the first quarter, and let’s say it has 10% of the market share. This company has to check the reports to see the overall revenue for the first quarter of the year and then simply multiply it by 4. By taking into account its market share, this company can easily extrapolate the final TAM figure.
Let’s say the revenue for the first quarter was $100 million. The TAM would be the following:
4 x $100 million x 10 (because this company’s market share is 1/10 of the total smartphone market) = $4 billion TAM
Since the bottom up approach takes into account a very small subset of data, it has its disadvantages. It may be more accurate for the global market because it doesn’t take into account consumer preferences, economic prosperity, nor population density.
Value theory. This method revolves around two questions – “How much value we can add to our products/services? And “Why is that value going to increase sales?”. To make this method accurate, the company has to assess how much a customer would be willing to pay for that added value.
Exploring Your Competitors
You competitors are both major and small players in the industry. Exploring both of these will put you in a position to reap the benefits of competition-driven pricing. Here are few methods that can help you learn a thing or two about your competitors.
Look them up on Google Trends and compare where does your company stand against them. Google alerts is also great for competition exploring. You can make all sorts of alerts to get informed whenever somebody talks about you and your competitors.
Your next stops are Gartner, Statista, trade associations, and advocacy group websites. You can learn a lot about industry trends and your competitors by just glancing over these.
Your customers can tell you a lot about your competitors as well. Focus especially on the customers who you win or lose over your competitors. To excel at this, you have to master the timing of the customer satisfaction survey.
Adjusting your Offer
Whether you want to admit it or not, the prices on your products and services have a dramatic effect on your company’s profits. The best way to increase revenue is to adjust your offer. This process goes beyond analyzing your costs and looking at competitor benchmarks. You have to include customer value as well.
So, before you adjust your next offer, make sure to analyze what your customers want. The answer to this question can vary. Sometimes, they might want to buy more products for lower prices, and sometimes they would like to pay extra for the products built with higher quality. Sometimes, a small adjustment in shipping costs can get you an extra mile.
In any case, adjusting your offer should be fluid, and whenever you do so, you must make sure to collect the data from your marketing, service and sales departments so that you can see the results.
Testing applies to the period following the adjustments made to your offer. During this period, you want to get your hands on as much data as possible. Launch customer surveys and ask your in-house departments for weekly reports.
Keeping a finger on the pulse of your customer base is vital for your success. After a few months of testing, you will have sufficient data to draw conclusions and make adjustments to your strategies.
Hopefully, this information will help you understand TAM better and be able to calculate it on your own. Knowing your market’s full potential is the point where the real struggle begins. In order to increase revenue, you will have to explore your competitors, make adjustments to your offer, and to your pricing and marketing strategies as well.
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