Are you a b2b CRO or CSO who wants to grow your revenue by targeting the right market size?
You have heard of the concept of Total Addressable Market (TAM), which is the total revenue opportunity for your product or service in a given market.
But how much of that TAM can you actually win in a year?
The answer is not as simple as you may think. To get a realistic estimate of your annual market size, you need to break down your TAM into smaller segments and apply different conversion rates at each stage of your sales funnel.
Here are the steps to convert your TAM into what you can win each year:
◾ Convert TAM to Serviceable Available Market (SAM): This is the portion of the TAM that you can reach with your current product or service offering. A common rule of thumb is to multiply your TAM by 70%.
◾ Convert SAM to Ideal Customer Profile (ICP): This is the subset of the SAM that matches your ideal customer criteria, such as industry, size, location, budget, etc. A common rule of thumb is to multiply your SAM by 60%.
◾ Convert ICP to Marketing Qualified Leads (MQLs): This is the number of prospects who have shown interest in your product or service through marketing activities, such as visiting your website, downloading a white paper, attending a webinar, etc. A common rule of thumb is to multiply your ICP by 50%.
◾ Convert MQLs to Sales Qualified Leads (SQLs): This is the number of prospects who have been qualified by your sales team as having a need, a budget, and an authority to buy your product or service. A common rule of thumb is to multiply your MQLs by 65%.
◾ Convert SQLs to Opportunities: This is the number of prospects who have received a proposal or a quote from you and are in active negotiation with you. A common rule of thumb is to multiply your SQLs by 50%.
◾ Convert Opportunities to what you can Win: This is the number of prospects who have signed a contract with you and become your customers. A common rule of thumb is to multiply your Opportunities by 42%.
Using these rates, a $1B TAM converts to just $28.7M in annual market size.
Of course, these are just average benchmarks and you can adjust them according to your specific situation and industry.
Want a bigger annual market size? You have two options:
🔷 Improve your conversion rates at any or all stages of your sales funnel. For example, increasing your win rate by 5% is equivalent to increasing any other metric by 5%. Perhaps increasing the MQL to SQL % is easier for your business.
🔷 Expand your TAM by launching new products, entering new markets, or targeting new segments.
🙂 If you would like to see how these metrics and others like them are used to create a revenue plan, please reach out.