Paving the Path
Gauging your total addressable market (TAM) might seem like a mind-numbing financial exercise reserved for the strategy team. However, getting an accurate read on your market opportunity is crucial for any ambitious, data-driven sales organization.
In this post, we’ll walk through a bottoms-up approach to market sizing using data from BenefitFlow. We'll cover:
- The value of TAM modeling for sales teams
- Step-by-step guide to building a TAM analysis
- Translating your market opportunity into sales execution
Understanding your addressable market is the essential first step in expanding territories, allocating sales resources effectively, or simply leveling the playing field. Let’s dive in!
Defining Total Addressable Market ("TAM")
Your total addressable market represents the total revenue opportunity available for your product or solution. In concrete terms, TAM encompasses:
- Number of potential customers fitting your ideal customer profile (”ICP”)
- Share of those customers you can realistically sell to
- Average deal size based on your pricing model
Why It Matters:
Clarifying your TAM equips sales leaders with insights to:
- Prioritize high-value market segments
- Benchmark territory and quota planning
- Set tangible targets for sales reps and teams
- Assess partnership opportunities (in the case of employee benefits sales, this usually benefits brokers/consultants)
- Articulate growth potential to investors
Top-Down vs. Bottoms-Up TAM Analysis
👍 A quick word on Top-Down vs. Bottoms-Up TAM Analysis and why a Bottoms-Up approach is almost always the way to go.
Top-down TAM analysis: starts with a broad market estimate and narrows down to the segment relevant to your product or service. For example, we’ve seen some begin their TAM calculations by pointing at the fact that “U.S. healthcare spend represents 17% of GDP” and celebrating the fact that even a very small % share of that market represents billions of $$$!
While this method can offer a quick “back of the envelope,” it often relies on highly generalized assumptions that fall apart when you peel back the onion. This lack of granularity often leads to overestimating your true market potential.
Bottoms-up TAM analysis: builds the market size from detailed, specific data points, such as the number of potential customers, average sale price, and assumed conversion rates. This method provides a more accurate and defensible view of the market, grounded in real-world data and direct observations. For sales leaders, bottoms-up is the way to go… as it translates to more accurate estimates and provides the granularity you’ll need when putting your sales strategy into action (as we’ll cover later on).
Step 1: Accessing a Market Data Set
Given our scope is confined to the U.S. Employee Benefits market… this is where we’ll focus. For many of our customers, the EB market (i.e., Employers) represents their entire scope, while others may address the group market and the private/retail market. Below, we’ve done our best to frame the entire U.S. health/benefits market and illustrate some of the data sources that cover each segment (and yes, we shamelessly plugged BenefitFlow here as we believe it’s the best data source that captures the employer-sponsored market 🙂).
Step 2: Conducting the Analysis
Now that we’ve found a data source for our bottoms-up analysis, let's walk through a sample TAM analysis for a fictional BenAdmin platform: “BenefitBoom” (we're still working on the name 🙂). BenefitBoom has emerged as a new player among middle-market employers, and its sales team is looking to capitalize on the company's recent traction and grow aggressively.
1. Define your Ideal Customer Profile (ICP)
Consider company size, industry, geography, and whether the group is self-funded. Get targeted! After analyzing win rates across our CRM data, we know our solution only addresses self-funded employers with 100-5,000 employees.
2. Cut the Market Data
BenefitFlow provides rich filters to segment the employer populations that fit our ICP. Given BenefitBoom’s target market, we can understand the total number of companies and employees within that segment.
It can also be valuable to run some cohort analysis to see how the market opportunity maps to various sub-segments. For example… the 1,000-5,000 cohort has far fewer companies than the 100-500 cohort. However, 14.5 million employees work at those larger organizations! You can similarly run these cuts by geography, renewal date, industry, and more. The insights won’t always be groundbreaking, but sometimes, all it takes is one new finding to change the direction of your sales strategy.
Pro Tip: When thinking about TAM… remember to exclude portions of the market that are not ‘serviceable.’ For example, if we do not have support resources in California… we might not have access to that market yet.
Step 3: Estimate the Revenue Opportunity
Now that we’ve filtered down to our TAM, it’s time to take our market data and layer in revenue assumptions.
- Uptake Rate: Do we usually address 100% of employees in a given account or a portion of them? Make sure to be conservative here to ensure you don’t overestimate your average wallet share.
- Assumed Price Per Employee Per Year (”PEPY”): Of those employees that utilize our solution, how much annual revenue are they worth to us?
- TAM: Putting it all together… we now have a ballpark view of our revenue potential!
💡 By leveraging BenefitFlow's filters and employer data exports, you can conduct a similar TAM analysis tailored to your ICP.
Next Steps:
TAM modeling maps your revenue potential to strategic decisions that drive growth. With your market sizing complete, the key next steps include:
- Distribution Strategy: How will we capture the revenue opportunity? Via direct sales, broker partnerships, or a combination of both?
- Territory Planning: How should the revenue opportunity be distributed across our sales team? What goals should we set for them?
- Sales Execution: How will our sales team capture revenue opportunities in their respective territories?
Part 2 of this series offers some guidelines for thinking through your distribution strategy.