Defining Your Total Addressable Market: Unlocking SaaS Growth Potential

How Important It Is to Know Your Market

Brian Chesky and Joe Gebbia, the founders of Airbnb, were having a hard time making ends meet in 2008. They had a good idea—letting people rent out their homes to tourists—but investors wouldn’t put money into it. Why? Their pitch was missing an important part: a clear picture of their Total Addressable Market (TAM). Their business started to take off after they changed their TAM to focus on travellers looking for unique and cheap accommodations, not just travellers in general. Airbnb is now a huge global business worth billions of dollars.

It’s just as important for SaaS companies to understand and define their Total Addressable Market. It’s important to have a good understanding of your TAM before you launch a new product, make a change, or grow your business. It’s not just a thought experiment; it’s a way to get your business to reach its full potential based on data.

What is the total market that can be reached, and why is it important?

Your Total Addressable Market is the total number of people who could buy your product or use your service and make you money. It answers the question: how much money could you make if every person or business that could use your product actually bought it? It may seem like a simple idea, but figuring out your TAM correctly requires accuracy, market research, and assumptions that are based on facts.

This is how TAM helps SaaS companies:

Set priorities for resources: You can focus your marketing, sales, and development efforts where they will bring you the most money if you know which groups of people are the most profitable.

Bring in investors: Investors and other important people can see your growth potential through a convincing TAM calculation.

Set Goals That Are Doable: Knowing your TAM helps your organisation set revenue goals that can be reached.

Let’s say you make software for small businesses that helps them manage projects. You wouldn’t think that your TAM includes all small businesses in the world. Instead, you’d focus on the industries that use similar tools the most. This level of focus keeps you from overestimating your abilities and makes sure that your business plan is based on facts.

The Three Keys to Figuring Out TAM

It takes more than guesswork to figure out your Total Addressable Market. To segment, quantify, and validate your market, you need to do it in a planned way. The three most common ways to figure out TAM are:

Top-Down Method: To figure out your TAM, this method uses market research and industry reports. As an example, your TAM could be $3 billion if the global market for project management software is worth $10 billion a year and 30% of that is made up of small businesses. This method is quick, but it may not be very accurate because it assumes that your solution fits perfectly with existing market segments.

Bottom-Up Method: This more accurate method starts with the price of your product and information about your customers. Your TAM is $100 million if your average customer spends $1,000 a year and you think your target market has 100,000 potential customers. The bottom-up method gives you a detailed, data-driven picture of how much money you could make.

Value-Theoretic Approach: This method is great for new products because it figures out how much people are willing to pay for your product based on how much value it creates for them. For instance, if your AI-powered CRM cuts down on sales administration work by 50%, you would figure out your TAM by figuring out how much money your target market saves in time.

When you use all of these methods together, you usually get the most accurate TAM calculation. Each one gives you different information that, when put together, can give you a full picture of your market opportunity.

How to Avoid Common TAM Mistakes

Many businesses fail to define their Total Addressable Market, even though it’s important. Don’t fall into these traps:

Misjudging the Size of the Market: It might sound impressive to say that your product is liked by “everyone,” but it’s not usually true. This kind of overestimation can waste resources and miss chances to take over a niche.

Ignoring How the Market Works: TAM changes over time. As the market, your competitors, and your customers’ needs change, you may need to re-adjust your TAM.

Not Validating the Data: Numbers used to figure out TAM should come from trustworthy sources, like market research reports, customer surveys, or an analysis of the competition.

How TAM Works: Success Stories in SaaS

Take the app Slack as an example. At first, Slack’s communication platform was geared towards small tech teams. By figuring out the exact Total Addressable Market and narrowing their focus, they were able to grow quickly before going after enterprise markets. Today, Slack’s success comes from being able to find and dominate certain market segments before expanding to new ones.

In the same way, HubSpot’s journey shows how powerful TAM can be in SaaS. HubSpot was first made for small businesses that needed tools for inbound marketing. By limiting their TAM, they were able to make a product that was perfect for a certain need. This helped them build a strong customer base before adding tools for sales and customer service.

Using TAM for strategies for going to market

It’s not enough to just name your Total Addressable Market. You can use your TAM to improve your go-to-market (GTM) strategy once you have it down:

Splitting up: Divide your TAM into groups of customers based on their behaviour, industry, location, or company size.

Positioning: Make sure your messages and value propositions are specific to each segment.

Channel Strategy: Figure out which sales and marketing channels will help you reach your ideal customers the most.

This alignment makes sure that all of your efforts are focused, which helps you get the best return on investment (ROI) and grow faster.

What HubSpot and 9H Digital Can Do To Help

HubSpot is a leader in CRM and marketing automation, and it has powerful tools that can help SaaS companies get the most out of their Total Addressable Market. HubSpot makes sure that your TAM calculations are based on data and can be used by giving you tools like advanced reporting, predictive analytics, and segmentation.

For instance, HubSpot’s ability to connect to data platforms lets you get real-time market information, divide your audience into groups, and make campaigns that are very specific to those groups. You can improve your GTM strategy and see measurable growth with the help of 9H Digital’s HubSpot implementation skills.

Are you ready to see how HubSpot can change the way your SaaS business grows? Our HubSpot expert, Ale, will give you a demo so you can see how we can help you figure out your Total Addressable Market and reach your full potential. Book a call here.