You don’t have to be an experienced business person to know that before addressing a new market you have to thoroughly understand it and estimate the potential of both that market and your product there. Regardless of whether you are a start-up or a business considering expansion to new locations, preparations should be made, plans crafted and strategies built.
I have been through this a bunch of times, and have helped others understand what and why should be considered when estimating their market potential. Plenty of my company’s customers are reaching out to us to get data for both their market and competition research and B2B addressable market assessment. Mine is not a consulting company, we are a data provider. Yet oftentimes when determining with our potential clients whether our product is the best fit for them, along with other goals’ accomplishments, we do discuss whether the required datasets are applicable for a thorough comprehension of the total addressable market. Hence my decision to write this post.
Where to start: delimit the components of your addressable market
Generally, in order to estimate as accurately as possible your potential addressable B2B market, you need to shape and identify the following components thereof:
- Total market potential, which you can calculate by multiplying the total number of opportunities on that market with the average price of a closed deal. In other words, if each client on that market who can use your product would have bought it from you, what would you have totally made. The value of the outcome is a ballpark figure, yet it is an important metric for the macro understanding of the market you’re willing to address.
- Total addressable market, which may also be called total obtainable market. It reflects the product of the average price of a closed deal and the (real) number of targetable opportunities on the given market. It shapes the financial opportunity it represents and can stand as a benchmark for the assumptions you need to make for your go-to-market strategy. Total addressable market is that delimitation of a section of the market which allows you to optimize your efforts by not wasting your resources on following businesses that are not your clients at this moment and that are dead-end opportunities. Segments may also help to estimate the potential of the market you are willing to address. For example, if you are using the size of the companies as the criteria for segmentation, you could consider the value of your total addressable market as the sum of the products of shares of your segments and the average price of a deal closed. In other words: Total addressable market = % micro-businesses * $ deal + % small businesses * $ deal + % mid-size businesses * $ deal + % large businesses * $ deal. This kind of approach will deliver a more reliable understanding of what you may achieve.
- Serviceable available market, which is also known as serviceable obtainable market. It is the revenue portion estimate within a specific segment that your company can attain. Among the most important factors to consider for serviceable available market estimation are reach and competition.
- Expected share of the addressable market, which is that segment of the market that you are going to win in a specified period of time. This is a more requiring, involved part of the process, as this data can be estimated via on-hand research, surveys and other techniques.
One important aspect to consider is the price of your product. Ok, if yours is digital and you can trade it globally, chances are high that the price will be unique regardless of your client’s location. However, there are plenty of cases where price will have to vary regionally, and will have a great impact on your product’s evolution on that market. Besides, when making your estimations, you don’t use the price your competitors charge on the same market, you take the price you are going to require for your product. Don’t forget, that price is an important element of the equation designed to estimate the returns you’re going to generate on the given market, hence is pivotal in estimating its potential.
What you should also understand is that the potential of the market you are willing to address is not given by its total size nor by the size of the problem you are willing to solve. For example, you are offering a digital solution for human resources departments and are willing to address the US market. Even if the total HR management market by software was estimated at US $16.1B in 2019, this does not mean that the value of your potential market has the same value, and not even a percentage of that value. To have the closest to accurate figures in mind, we should dig a bit deeper into this example. Let’s see. If I ask you whether your solution is suitable for absolutely all sizes and types of companies and their HR departments, probably your answer would be no, it applies best to, say, those that have over 200 employees with computer-related jobs. Ok, I might consider asking whether you are talking about any type of computer-related jobs, as this may refer to sales, marketing, IT, financial, design and many other verticals. As all these have different working procedures, you surely would just stick with some of them, say web & digital design and marketing and sales companies. Yet I’d ask again whether you would target all of these companies, and maybe you’d answer that, actually, your product would fit best those businesses located in large cities and metropolises. Now that is your addressable market. Once you define the price you are going to charge, say per company per yearly subscription, you can multiply that with the number of companies that correspond to your criteria, and achieve in such a way the value of the total addressable market.
Depending on the vertical, this may be an easy task to accomplish, yet very likely it will not, and you’d need to apply to a data provider to make it easier and faster. In the example below, the above-mentioned criteria are selected in a matter of a few clicks.
Why do you need to understand your market size well?
For a B2B company, understanding its market size is crucial for a series of strategic decisions as well as planning. All of these are made on heavily-important data-driven assumptions as well as quite sophisticated models. Yet it is not rocket science, especially when you get to grips with the why’s of the need to know the real market potential for your B2B product. Here are the business decisions that would strongly rely on the estimates to be made:
- Introducing a new product on the market. In this case, first and foremost the value of such an action should be considered, for both — the market and your company.
- Launching your product on a new market (geographically) or to a new segment. Think of the impact that this will have on your business in the mid- and long-run.
- Prioritizing the resource allocation according to the size of the market you choose. The bigger the market potential, the more efforts you will have to channel to accomplish the goals set.
- Identifying the most important segments. It is very likely that you will start small rather than run after all of your potential targets at once. Therefore, based on your research or previous experience, you will have to identify the segments you will address first.
- Evaluating human resources requirements. No matter what product and where you decide to launch, you will have to thoroughly assess what and how many professionals you will need to make it happen.
- Estimating the possibility of a partnership. You should consider the pros and cons of whether closing a deal with a local company would help you make your product’s performance more efficient.
- Performing due diligence for a possible M&A transaction. Similarly to a partnership, an acquisition could make your launch smoother. Therefore, you should consider running due diligence of a series of companies and of such a transaction.
All your estimations should be included in your business plan, which will generate further benefits. On the one hand, these will help to hold your business accountable by successfully passing each milestone and hitting the growth metrics set. On the other hand, showing both your market potential along with your comprehension thereof will help to raise capital, attracting investors willing to support your area of activity or those interested in your type of deal.
To accomplish valid annual business planning, you need to know your market size well by clearly defining how your market potential has changed year-on-year and how attractive your current market opportunities are. You should clearly single out the market to be sized and further apply a series of intel sources and approaches and compare the outcomes for the most accurate result of market size estimation as well as growth potential assessment.
All in all, especially when looking for investors, you should show exactly and honestly all your data delivering — besides your main message — your image as a trustworthy business person. You should do your best to stay assured that you base your research on accurate data, otherwise your estimations will be wrong and may ruin your company instead of helping you grow.