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?”
That’s often called your Total Addressable Market, or TAM. You can think about your TAM as the ways to define the market that would buy your solution.
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.
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.
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 your 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?
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.
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.
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.