How inbox placement affects your TAM
Mapping out your market allows you to understand the total value that your total go-to-market investments can capture. While further segmentation of your market to quantify the segment of the available market which you’re likely to be able to obtain at this point in time is also vital to promote capital efficiency in your go-to-market efforts.
Unsustainable go-to-market models are usually caused by investing resources in segments which are either (a) not obtainable based on your current business stage or (b) the segment of your market which is obtainable being too small to deliver enough value.
One of the key aspects impacting how much of the market you can obtain is your inbox placement. This means what percentage of emails you send land in the primary inbox (rather than spam). The larger the proportion of your outbound emails that land in spam - the fewer leads you can generate, even at accounts which are, in theory, a perfect fit for your solution.
As a heads up, we’re niching down from the classic business school way of calculating TAM, SAM and SOM in favour of a model which specifically helps operationally with go-to-market.
Inbox placement is going to impact the number of target businesses which can see your email prospecting - limiting your SOM, because if you cannot receive engagement at a target account, you will not be able to obtain the value associated with it.
In this post, we’ll outline
- What are TAM, SAM and SOM
- Defining Total Addressable Market (TAM)
- Calculating Serviceable Available Market (SAM)
- Calculating and Developing Serviceable Obtainable Market (SOM)
- A Quick Recap (if you didn’t have time to read everything).
What are TAM, SAM and SOM
TAM, SAM and SOM are different ways of defining the value of the market you sell into as a business.
Conducting the exercise of defining each of these as dollar figures have primarily been useful for business analysts and investors to understand the market size which a business operates in, either for comparison purposes or to justify the risk of an investment.
These principles are less commonly applied by go-to-market leaders for operational purposes, but conducting this exercise, at least on an annual basis with your leadership, helps to build alignment across the entire team and understand detailed constraints on the success of the sales and marketing team. This is why modelling out TAM, SAM and SOM is now rising in popularity at a time when capital efficiency has become a priority for all businesses.
Defining Total Addressable Market (TAM)
The total addressable market, or (TAM) as an acronym, is usually based on an overall industry valuation at a high level. As an example, Allegrow operates in the SaaS industry, which has a forecasted value of $195 Billion in 2023.
The value of your TAM should be understood to provide context on the wider industry that you are a part of and how favourable the growth and operating conditions are inside that industry.
The total market will be rarely considered for sales and marketing and provides minimal operational value. This is why we would advise you to primarily concentrate your efforts on accurately calculating your current SAM + SOM, while also creating a long-term plan for how these will expand as you scale.
Calculating Serviceable Available Market (SAM)
While calculating your Serviceable Available Market (SAM), you're attempting to define how much of the wider market value can be captured based on your business model and product.
The worst way to think about this is a percentage of the overall market, as it’s highly inaccurate. If you choose to create the SAM simply as a percentage of the overall market which you deem to be realistic, this would be referred to as ‘Top-down market sizing’. However, if you carry out what we recommend below, you’ll be conducting ‘Bottom-up market sizing’, which is highly tailored to your model and helps the entire team understand your ideal customer profile.
Bottom-up market sizing means you’ll need to define the number of businesses you are likely to be able to sell your solution to and the value associated with these sales. In order to accurately create the criteria of business you can sell to, you’ll want to profile your existing customer base and collect data to create ranges for the following:
- Size - This should provide you with a range of the size of businesses you have a track record of selling to (for example, 10 - 1,000 employees).
- Industry - This should provide you with a list of industry/sector categories of businesses in your customer base.
- Location - There may be some regions you have no track record of selling to, therefore it may take time to build traction due to either language or infrastructure requirements.
- Average Customer Value (ACV) - To calculate your ACV, simply take your overall revenue and divide this by the number of customers you have. This will allow you to accurately estimate the value of each business that fits your customer profile.
The two biggest mistakes teams make while calculating these numbers, which can lead them to becoming vanity metrics, are:
- Including businesses with characteristics (size/industry/location), which you have no track record of selling too. For example, if you don’t have any customers that are in the financial services industry, then accounts from this sector should not be included in your SAM.
- Making assumptions around the value businesses will pay, which are not based on average customer value. For example, assuming that as you go up-market you’ll be able to charge $100K per year on average when your current ACV is $20K per year.
The work Marketing does on building brand awareness will be focused with the SAM as their ICP. This will help improve the percentage of your SAM which translates to Serviceable Obtainable Market (SOM). Sales, on the other hand, will want to have a high-level understanding of the SAM, but dedicate the majority of their time and resources to closing the Serviceable Obtainable Market (SOM) efficiently.
It is important to note, you will want to recalculate SAM as you reach certain milestones. For example, you may launch a new product which significantly expands your SAM.
Calculating and Developing Serviceable Obtainable Market (SOM)
The key difference between a segment of the market being available vs obtainable is your ability to consistently convert this segment into actual revenue.
You’ll also want to clearly define the timeline that you’re calculating the SOM over. Typically keeping a SOM timeline short will mean a far smaller number, but this keeps the exercise highly actionable.
In order to calculate the percentage of accounts from your SAM which will become obtainable and therefore be included in your SOM, you’ll want to consider the following aspects:
Signals you can track, which indicate that these accounts are a good fit to enter your prospecting process. (e.g. Specific Hires, Intent Data, Website Visitors, M&A, Fundraising). Essentially, you’re calculating how many accounts from the entire ICP are going to experience a specific pain point which means they look to implement your solution within this timeline (these business needs will be driven by external factors you can track, not your own marketing in most cases).
Businesses which assume their marketing will be good enough to create intent, are carrying out what would classically be referred to as ‘educating the market’. This is usually far less efficient and successful than mapping specific changes which make the problem your solution solves become top of mind.
Engagement / Inbox Placement
Given that email is the key channel you’ll use for prospecting, you’ll want to use data on inbox placement to help forecast how many leads you’ll be able to generate from your accounts. This means calculating how many of the accounts which enter your prospecting process have the opportunity to even see your pitch.
Close Rate / Value
You’ll need to consider how many of the total accounts who engage with your team ultimately go on to become deals and the subsequent value of these deals. This is easier to forecast simply by using historical data on performance and is less prone to inaccuracy as you scale.
As a working example putting these 3 concepts together:
- You define 10,000 of your target accounts which have at least 1 intent trigger over the coming quarter.
- As a business, you currently have an 80% inbox placement rate with a subsequent 25% lead generation rate.
- This will result in 2,500 accounts entering your closing process. If you forecast a 10% close rate and your ACV is $30K, you’ll be able to obtain $7.5 million in new ARR over the quarter.
Inbox placement can change these numbers dramatically. For example, if you optimised inbox placement rate to 95% rather than 80%, you would be able to generate leads at an additional 470 accounts, which represents an additional $1.4 million of new ARR inside the quarter. This works because the engagement/leads you generate at every account are directly correlated to prospects being able to read and respond to your target messaging.
- TAM, SAM and SOM are different ways of defining the value of the market you sell into as a business.
- Quantifying your SAM and SOM are integral to promote a capital-efficient gtm process.
- TAM helps to provide context on the wider industry growth conditions but will rarely be used operationally for sales and marketing value.
- You should calculate your SAM based on profiling your current base, rather than using aspirational assumptions around ICP.
- Conducting a bottom-up market sizing of your SAM is fundamental to understanding the ideal customer profile.
- Keeping your SOM constrained to a specific timeline will result in a smaller overall number, but keeps the exercise highly actionable.
- A low inbox placement will limit your SOM as target accounts will not be able to engage with your sales and marketing efforts
- In order to calculate an accurate SOM we suggest taking into account factors such as (a) Triggers (b) Inbox Placement and (c) Close Rate + ACV.