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Building Your Total Addressable Market (TAM)

Part 2 in a series on 12-Point Prospect-Experience Transformation

By Dan McDade

The set of prospects that do (or will) desire your product or service in sufficient number is your Total Addressable Market—or TAM.

The TAM is not necessarily every prospect that could possibly buy your product or service. It may be that you will cherry pick from the very best prospects—leaving some marginal prospect groupings for later—or perhaps never. We will cover this in more detail in this blog.

Identifying the best prospects is a key step in achieving prospect experience transformation. In fact, it’s the 2nd step in a 12-step process.

If you are at this step, it means you’ve already covered AULD. AULD stands for Agreed-Upon Lead Definition —that’s the 1st step. You’ve gotten sales and marketing together and you have mutually agreed on what constitutes a lead. This is important because from there forward marketers turn over only leads that meet the definition, and, assuming they do, sales can no longer ignore them because they’re “no good.”

If you’ve taken care of AULD but haven’t yet determined your total addressable market, it also means you’re not ready yet for segmentation, which is the 3rd step in the process.

You are in-between those two steps. You cannot proceed until you (in conjunction with sales and marketing) have pinpointed your market based on size, vertical, location, environment and active or latent need.

Building your total addressable market, or TAM, keeps you from wasting time and money by approaching prospecting like a bottomless pit. Instead, by sticking with a not-too-broad and not-too-limited prospect base, you achieve the just-right mix of efficiency and effectiveness.

An aside, do you refer to what I am talking about as TAM, or do you call it TOM or SOM? TAM as you now know, stands for total addressable market. TOM stands for total obtainable market. SOM stands for serviceable obtainable market.

TOM and SOM are not distinct from TAM—they’re just different ways of saying the same thing. In my opinion, your total addressable market, or TAM, by its very definition, must be obtainable, and it must be serviceable, or it wouldn’t be addressable. The important thing is not to get bogged down by semantics. An accurate TAM is critical to your future success.

In addition to the common-sense reason to establish a TAM—prioritizing business opportunities based on revenue potential—it’s a great way to uncover constraints that are important to take into account.

For example, resource constraints (time, money) limit the targets that you can effectively market to. As a simplistic example, I suggest to clients that if they have the choice between spending $1 on 10 prospects or $2 on five prospects to opt for the latter—spend more on fewer prospects. Spending more on highly responsive groups within your market makes sense as opposed to spreading those dollars too thinly into less responsive segments of the market.

Only a small percent of any given group of prospects will be in the market for what you sell at any given point in time.

For example, if 5% of prospects are in the market for your service and you have a close rate of 20%, then 100 prospects will generate one closed deal per sales cycle.

So, if the sales cycle is three months and you need five deals per quarter, then the target market (TAM) will need to be 500 prospects. You might say that the TAM is dependent on your sales goals. At the beginning you are basing your TAM on intuitive assumptions. Over time, the TAM is based on real results and could scale up or down depending on those results.

After the agreed-upon lead definition (AULD) is created, you are ready to develop the TAM. To develop the TAM you must: 

  1. Acquire data

  2. Test that data

Data Acquisition

Unfortunately, there is no such thing as a good list. Never has been, never will be. Lists generally suck. Here are some reasons why:

  • Lists are expensive to keep clean. People change jobs, big guys buy little guys. Big guys buy big guys. Companies shut down. The speed of change accelerates every year, and it’s costly to keep up.

  • People have the wrong idea about how much lists should cost. They think lists should cost a lot less than they do, they think they’re all worth the same. As an example, I’ve seen senior executives authorize $10, $15 even $20 for a “lumpy” or dimensional mailer and then argue over $.25 per name when buying a list. In this case, scrimping on the list means that that most of the mail is sent to the company without a contact or to someone who is no longer with the company. The goody sent to make the package appear valuable (sometimes called the bribe) goes home with the mail room attendant. This is because nobody is willing to pay to keep the list current. The perception that lists should be cheap certainly does not incent list owners to make investments in list cleansing. Regardless of what media is being used (lumpy mailers or a series of touches dictated by cadence rules) it makes sense to start with the best database you can—and a lot of times that means you are going to have to build it using multiple sources and a lot of clean-up work.  

  • Finally, vendors simply get away with selling sub-optimal lists. They get away with it because in many cases the buyers of the list have no idea what percentage of the list had value (or not). Not a clue. Without testing, you’re flying blind and wasting a lot of money.

My rules for acquiring the best possible data:

  1. Test, test, test. Don’t go after the whole universe when acquiring data. Buy small samples (for example, if you sell nationwide select just three or four representative states and be sure to select those same states for every list you test.) See more on data testing below.

  2. Focus more on getting the right companies and not so much on the right contacts. Contacts will not be fresh—every week there will be changes. Rather than pay a premium for contact information that is probably highly inaccurate, just make sure you have selected the right companies and use LinkedIn and other data sources for the contacts.

  3. Make sure the contacts are offer-appropriate. You do not always need to “go high.” Often, the C-level and SVP-level contacts are not involved in decisions “owned” by lower level executives.

Data Testing

List testing is cheap and just makes sense. The easiest way to explain is with this story:

I was visiting a client to talk about program results. The client let me know they were going to ask us to follow-up on a direct-mail piece going to 685 senior executives in the New York City metropolitan area. It was an expensive mailer—about $12.35 each. The offer was an upscale dinner in NYC followed by a NBA game.

My first question was “have you tested the list?” The client said no. They said that it was an expensive list and the vendor guaranteed 100% deliverability. I suggested that they take a few extra days and call into 100 of the targets. I told them we would do it at no charge.

The results:

  • ·Half of the list was outside of the New York City metropolitan area (the target market due to proximity to the restaurant and the game).

  • Of the remaining half, 20% had no contact name associated with the company (the mail house would have mailed them anyway—and the mail would have gotten dumped or would have otherwise been wasted).

  • More than 10% of the remaining addresses were bad. Many of the companies reported that the contact was no longer employed by the organization.

The bottom line is that we trashed the entire list, built them a new, accurate list (for a fee) and they enjoyed excellent campaign results.

Remember: List testing is cheap and a no brainer.

If you use marketing automation (MA), Read this blog (published in CMO by Adobe) for more information about calibrating and validating your lists to improve marketing automation results.

Data Acquisition and Testing is How to Build Your Total Addressable Market (TAM)

Lists have become highly specialized over the past three to five years. Don’t let that fool you. Even expensive lists will not be 100%, or even 50%, accurate.

My recommendation is to multi-source lists focusing on the company information and not the contacts. As already covered herein, what you want is the best coverage of the market you have carved out. Contacts change. You can find contacts for almost any company on LinkedIn or with other tools. Having missing contacts is fixable. Having the wrong companies or not owning the market you have decided to target can be very expensive.

What I look for in identifying a TAM are the following:

  1. Vertical (SIC or NAICS code, but be careful—this information is frequently self-reported and inaccurate)

  2. Firmographics (revenue, # of employees and/or # of locations—also often inaccurate)

  3. Decisionmaker/influencer roles in the decision-making process

  4. Environment (related to each solution—such as "technical environment"

  5. Business issues/pains uncovered and validated (or, there is no perceived pain, but the prospect qualifies for your TAM because they will eventually be in the market for what you sell)

  6. Compliance issues or other reasons for a sense of urgency or compelling event

If there are 5,000 target companies in your market, there will be a percentage of those companies that will out-perform other companies on the list.

That is why it makes sense to acquire 10% to 20% of the targets (one to 2,000 companies in this example) and test them rather than buying the whole universe. Similarly, if you already own a large percentage of your target market, it never makes sense to clean-up the whole list. Test, test, test. You will find that you will enjoy 80% of a list clean-up project by cleaning up 20% to 40% of a list. You will, with each iteration of list cleansing, reach the point of diminishing return. In this blog I provide a detailed approach to segmenting your market.

Final Notes:

  1. Acquire and test small amounts of data before acquiring large quantities of prospects in your TAM.

  2. Start with the end in mind. Calculate/estimate the percent of your market that is in a buying process and what percent of qualified prospects you can expect to close. Then calculate how many prospects need to be in your TAM. Remember, you can always adjust upward but you should probably avoid being in a situation where you have to adjust downward.

  3. There will be higher and lower performing parts of the market on even a small TAM. Always be testing to see which portion of the TAM  should be retired and, potentially, replaced.

If you want to talk TAM, my email and telephone number are below.

Nancy JoyceComment