SaaS start-ups looking to make their market entrance often don't know who to focus on.
It’s exciting when a company has developed a product or service that has proven to be desirable by the marketplace—what we in marketing call demonstrating a product-market fit.
It’s even more exciting when those outside your organization recognize your product’s value and contribute funding to company’s efforts.
We help SaaS companies go-to-market, or expand into new markets, by examining three things:
Understanding your SaaS company's TAM, SAM and SOM will give you insight into the funding requirements and efforts you'll need to penetrate your market, while also showing you the opportunity for growth.
Let's dig deeper.
When we work with B2B SaaS companies, one of the first questions you need to answer is “What market am I in? What market do I want to service? What is the solution I provide, and how do people define the audience that could benefit from that solution?”
TAM represents your Total Addressable Market. Based on what your product does, or service is, TAM is the entire market you could target if you had unlimited time and resources. If you didn’t have any restrictions, what would that market look like?
When you provide software that helps nonprofits manage their expenses, there are a lot of different subsegments within this market. Because of this, your TAM could have multiple parts of that market at different sizes.
You could have nonprofit organizations that provide emergency relief, you could have a nonprofit organization that is religious (like a church), or you could have a nonprofit organization that represents certain groups of society. These different sizes of groups are your TAM.
If you have software that specifically addresses the needs of nonprofit organizations, then this could be a way to think about your total addressable market. And when you add these up, there might be 50 million nonprofits worldwide that could use your product.
Things like an NPS score or churn levels are great ways to find out what parts of the market are a better fit for what you do.
When analyzing fit, ask yourself: are there certain parts of the market where you already have a position?
These are your 'beachheads', or the parts of the market where you have testimonials and customers referring other customers.
Maybe there’s a part of the market that’s easy to sell to and doesn’t have a very complex decision-making cycle, and they’re a good fit. You have a lot of those as your current customers that told you you do a great job for them.
Now, you’ve found that sweet spot with a relatively straight path of entry and path to sell and a great fit, this will become your ideal serviceable and obtainable market based on what you can do today.
This is also how you think about nailing your first niche, or winning a certain part of the market without a lot of competition. Using the TAM, SAM, SOM framework makes it relatively easy within a year to achieve a certain growth target.
If you don’t do that and you go after all of these, or you go after the big parts of the market because they look lucrative but they’re hard to sell into and you don’t necessarily have an existing position, it’s very hard to accomplish that in a short time frame.
A good indicator of prospect promise and customer growth is negative churn. Churn represents those customers who at some point leave. Negative churn equates to customers who not only don’t leave, but that actually buy more. For them, revenue per customer is growing.
Also, look at things like customer satisfaction or net promoter scores (NPS). People who refer you to others, customers who have given excellent word-of-mouth type references to other customers or prospects that became customers.
The next step is figuring out which of those organizations you can actually service.
This is your serviceable addressable market, or SAM, defined by how you’re able to address the specific needs of some parts of this market better than other parts of the market.
This is what we call product-market fit, or PMF. To find out where you have the best serviceable addressable market, see if there are places in that market where your existing customers are loyal to you, buying more or are satisfied with your services.
Things like an NPS score or churn levels are great ways to find out what parts of the market are a better fit for what you do.
All of these things can help you winnow your TAM to a more manageable SAM.
Finally, you can have a lot of parts of the market that fit well -- let’s say that out of five parts of the market, there are two that are a great fit, so you decide to focus on these two parts (but you also have limited resources).
This is called your SOM, or serviceable obtainable market. Your SOM means that you can only service a certain amount of customers, a certain part of the world or geographic area, or a certain size customer because they’re too big or too small then the way you service them won’t fit.
I like to think of this as the low-friction path to success: find out where the friction is lowest out of all customers that fit and potentially fit that you could service and sell to. Friction is driven by the complexity of the sales cycle - do you have the ability to integrate with the technology they use?
Helpful questions to ask are: What is the niche that you want to nail? What is the focus area that you really want to win? And where do you want to go first? Keep in mind, you can only do one thing really well at a time. So, it’s important to answer these questions.
Factors may include what vertical segments would be easiest to sell to.
Maybe there are two parts of the market, and one part of the market uses a piece of technology that integrates well with your solution. Maybe you have a requirement that is related to the regulatory needs of your customers you satisfy, which makes it easier for you to sell into a certain part of the market because you satisfy that requirement.
In short, these companies represent your SaaS company's sweet spot, your marketing bullseye, and beachhead.
Understanding your TAM, SAM and SOM means your SaaS company can find the path of least resistance to win and retain your customers by servicing them well. In the end, you might only find one part of the market that passes this test.
Visualize this exercise by thinking about fit and friction as two dimensions: one about which part of the market is easier to service and has a lower friction.
In this case, maybe it’s easier to sell to a church because there may be fewer decision-makers than it is to sell to the United Nations, a large nonprofit organization (and a great opportunity if you could actually sell to them), but there are so many decision-makers that this would be very hard.
Where’s the competition? Are there certain parts of the market that have a more competitive presence than others? The market segments with fewer competitors would go to the right of this spectrum.
Stijn is Kalungi's co-founder and board member. He is a serial SaaS marketing executive and has over 30 years of experience working in software marketing. He is co-author of the T2D3 book and masterclass that helps startups drive exponential growth.
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