Maximizing SaaS Outcomes: Optimizing Your Total Addressable Market
Editor’s note: This is the third post in a series in which Georgian Partners’ Advisory Board member, Gab Goncalves, describes how he created value at PeopleAnswers, the predictive talent analytics software company he founded in 2001. If you haven’t already, we encourage you to read his previous post on having a clear value proposition or starting at the beginning of the series in which he outlines the six drivers of B2B SaaS business value.
Being able to articulate your total addressable market (TAM) to its maximum potential is critically important during fund raising or when seeking an exit. Investors want to know that your venture has the potential to be really, really big. Most would rather have an investment in a small company with a large TAM than in a large company with a small TAM. Why? Because a company’s future growth potential is limited by its TAM.
In the case of PeopleAnswers we were first perceived as being in the “assessment” space. But how big was that market and was it really a significant TAM? The answer to that question really starts with optimizing your value proposition (see my previous post). The TAM for “assessments” is probably in the hundreds of millions of dollars. The TAM for “reducing employee turnover” and “increasing employee performance” is in the billions of dollars. One more reason to have a clear, optimized value proposition.
In order to optimize our TAM, we did a bottoms-up analysis, looking at the number of customers we had in each of our key verticals. Then we looked at the TAM within each of one of these verticals.
For example, for hospitality we divided the total number of hotel rooms our customers owned (253,217 rooms) by the total number of hotel rooms in the US at the time (4,874,837 rooms) to calculate our US penetration percentage (5.2 percent). Then we took the total revenue we were generating from hospitality at the time (let’s use $10 million because it is an easy number to do math) and divided that by 5.2 percent. That meant that our TAM for hospitality in the US was $170 million. When we did that across our other key verticals including healthcare, restaurants, retail, contact centers and property management, we got a total US TAM in the billions of dollars.
And, since our solution was available at that time in 15 different languages and being used around the world, it was credible for us to then extrapolate globally, thus increasing the TAM further. What was clear from our work was that “reducing employee turnover” and “increasing employee performance” represent a large market both in the US and globally, and in the hands of the right acquirer it would be quite valuable.
That’s why being able to maximize the potential of your TAM and being able to explain it to potential acquirers is so important.
If you’d like to continue reading this series, check out our next post on creating a defensible and scalable solution.