Distinguishing TAM from Target Market: Making Strategic Marketing Decisions
As the fourth quarter approaches, you’re likely contemplating your marketing plans for 2023. During this process, terms like Total Addressable Market (TAM) and Target Market may arise, and it’s crucial to avoid using them interchangeably. While they are related, considering them as synonyms can lead to mistakes in your marketing strategy.
Let’s begin by understanding the distinction between these two terms. Your TAM represents an estimate of the overall market size for your product or service in the long term. For instance, if you specialize in selling left-handed spatulas, your TAM would encompass all left-handed individuals.
On the other hand, your target market refers to the specific individuals or companies you intend to focus on in the short to medium term. Using the left-handed spatula example, you might decide to target professional chefs who are left-handed by launching your utensils in restaurants—a subsegment within your TAM.
Crafting an effective marketing plan entails selecting a target market within your TAM that is sizable enough to meet your medium-term sales objectives (e.g., the next year or two), yet not so expansive that your messaging becomes diluted.
The Case of Avail: TAM vs. Target Market Confusion
In 2012, Ryan Coon founded Avail, a software application designed to enhance landlord-tenant management and communication. Avail initially defined its TAM as all landlords in the United States, leading to a generic marketing approach. However, by 2016, the company’s revenue growth had stagnated due to high churn rates.
Determined to revive Avail’s growth trajectory, Coon implemented a transformative strategy by narrowing their target market to a specific segment within their TAM—namely, “DIY landlords managing less than ten units.” This focused approach allowed Avail to simplify their product features for amateur landlords, resulting in improved retention rates. Moreover, the tighter market definition enabled them to craft compelling messaging that resonated with their target audience, leading to enhanced response rates.
Between 2016 and 2020, Avail’s revenue surged from $1 million to $7 million. This impressive expansion caught the attention of Realtor.com, who acquired Avail for approximately five times its revenue.
The Continued Importance of TAM
You might question the significance of your TAM if narrowing your target market is the key to effective marketing. However, your TAM remains important when engaging with investors or potential acquirers. Since acquirers and investors prioritize growth, they will want to grasp the total market size available for your product, even if you currently have no plans to target all segments in the short to medium term.
Your TAM contributes to the long-term value of your company, but for meeting your goals in the upcoming year, honing in on a specific target market is essential.
By understanding the distinction between TAM and target market and leveraging this knowledge in your marketing strategy, you can make informed decisions that optimize your growth potential while seizing the immediate opportunities within your chosen market segment.
Contact Investment Business Brokers to learn more about your industry and market size.