Total Available Market (TAM)

In last week's article I talked about seeing the big picture when it comes to Growth and ensuring you don't focus all your energy on Sales. You can take a look at that article here: https://www.linkedin.com/pulse/growth-elephant-matthew-mullen/. And now that we know that planning for sustainable growth is a pretty big exercise, it might seem overwhelming. But you know the old expression on how to eat an elephant... one bite at a time. Each week I will take one bite and go a little deeper into a step in the process. This week let's take a look at target market sizing.

TAM is perhaps the most important acronym in the growth lexicon. Total Available Market, aka the universe of buyers to which you can sell your product. This is the number that all forecasts are derived from and is almost always overstated. Before we go any further, let's understand that target market sizing is a combination of science, art and experience. It is unique to the product and/or service being offered. This is especially true for startups or other forms of new market entry - geography (country/region), horizontal (industry), vertical (segment). Companies with established customer bases that offer new products within that base have a lower degree of difficulty with this step and can often reuse models and/or data sources. For this exercise, let's assume it's pure new entry and you need to prepare a business plan for a pitch to private equity, or internally to your investment committee/leadership team. Where do you start?

• Source Data - before you can apply any assumption and start managing the population down to a true buying pool, you have to start with a unbiased set of data. There are a number of sources for this data in the United States, but it gets much harder when looking to expand Internationally. Finding a viable, reliable, repeatable data source is the critical path first step.

• Data Refinement - this is where you apply your market expertise to the process. Within the larger set of source data, what industries will find value in the offering? and what sub-industries within that group? and what segments within that group? There are more variables that refine your market size but these are a good start. Here is an example: you have built a robot that can pick, place and pack soft-goods (clothing) in a distribution center environment faster and more accurately than existing processes. What industries will find this valuable: Retail and 3PL; what sub-industries within that group: Soft-Goods; what segments within that group: Enterprise and upper Mid-Market. This refinement is also the start of your position and messaging as well, but that is a different bite we will save for later.

• Cycle Rate - this is the step that I think is most often missed. I represent this as the percentage of the market sized above that will purchase during a defined cycle - almost always a fiscal year for planning purposes. It is important to remember that just because it has value, it does not mean that every company (or consumer if CPG) is ready or able to buy on your schedule. Some industries are pretty well defined - the automotive industry knows how frequently consumers purchase new cars and plan their development cycles accordingly. But what about Enterprise Resource Planning software? How frequently do discrete manufacturers change this system? What about Retailers - how often do they change their Point of Sale, or Order Management systems? Or Small Businesses (SMB) - when do they upgrade and/or purchase a CRM application? Establishing this cycle rate will allow you to define a true buying population for any given year, which then allows you to forecast.

• Engagement Rate - now we have entered into Brand Marketing territory, again a different bite but important for this conversation. Engagement is simple to understand and really hard to get (shout out to all the CMO's out there!). How many of the prospective buyers we defined in the cycle rate are aware of your product/service. Unless you are Apple, it's less than you think. It's certainly not all of them. While this number can and will change based on your brand marketing efforts, it will generally lag and should be accounted for in the forecast. Defined as a percentage, you have now set a target population within the buying population.

You have done it! Now you have a working target market on which to base an annual forecast. There are still lots more assumptions to make before the forecast is complete - win rate, ASP, returns, etc. but you cut off, chewed and swallowed the first bite of your growth planning exercise.