Don't let TAM, SAM, and SOM mislead you and fall short of your B2B business objectives

Over the past decade, we haven’t encountered a single B2B business where realized growth was achieved using TAM (Total Available Market) sizing projections. Yet, the reference to TAM as a guiding force to set revenue targets and business strategy persists.    

Frequently this has resulted in companies falling short of growth targets internally or scrambling to meet unexpected demand. A great example was with a global B2B technology company that quoted multiple TAM growth estimates from industry analysts in an annual investor meeting several years ago as the validation for hitting their multi-year growth targets. Instead, their revenue was flat or declining each subsequent year, and they were scrambling to find growth while their share price severely underperformed the market and competition. Assuming their growth would match the expected TAM growth without validating if their own company could achieve these projections has cost that company billions of dollars in market capitalization.

As a business leader, you may have experienced something similar. What has it been like when revenue targets fell short, the prize size was substantive, or the category grew? Your company may also rely on outdated metrics like TAM, SAM, and SOM to set your business performance targets and corresponding strategy. While these metrics were initially designed for consumer markets, they are unsuitable for B2B companies.

TAM, or Total Addressable Market, is a rough estimate of the total market spending based on some multiplication of the average spend per customer and the estimated number of customers. Companies often use it when they try to project how much sales they should expect and allocate their budgets accordingly. However, this approach has several things that could be improved when applied to B2B markets.  

First, averages can be misleading, especially in B2B. An average marketing or sales spend of $20 is the same whether the lowest spend is $18 and the highest is $22, or the lowest is $0.05 and the highest is $1,000,000. It is the mix that matters. Average growth expectations are even worse; some companies in your sector will decline in revenue while others will grow at significant multiples of average growth rates.

Second, the number of customers needed to be successful in B2B is very different from consumer markets. When you have tens of millions of potential consumers and only need tens of thousands to be successful, it’s much different than when you have 4,000 potential companies that can buy your product and 4,000 are already buying something they think is similar.  

Third, TAM assumes that the obtainable share of the market is aware of you and demands your specific product or service. However, the cost of sufficient awareness is rarely considered when calculating TAM, SAM, and SOM, especially for B2B companies that rely on salespeople to raise awareness directly. Also, many interested companies may not be able to buy what you’re offering in the near term due to contractual constraints or associated change management costs that are not reflected in the cost of your company’s product and services.  

Finally, the number of people involved in purchasing can be significant in B2B. Unlike B2C, where a single person often makes the purchasing decision, in B2B, you can have 4-20 people involved in the buying process – TAM, SAM, and SOM do not apply to groups.

Instead of relying on these outdated metrics, a new measure has emerged – Highest Value Market: identifying your valuable and winnable customers. Valuable customers drive profitability, long-term growth, and network effects. Winnable customers are those seeking a solution like yours – the illusion of SOM is that valuable and winnable are the same customer.  

Answering these questions by measuring systematically and repeatably accelerates the growth of your company by identifying the highest value market (HVM) for your product or service – the intersection of valuable and winnable. This market is often much smaller than SOM and demonstrative of your business prospects if substantially higher than revenue growth in the previous two to five years combined. On the other hand, if you discover that your valuable and winnable customers don’t overlap, it is an advanced notice to adjust your business strategy before the results impair your corporate value and prospects.

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