In this regard, total addressable market (TAM) and ideal customer profile (ICP) are two crucial concepts that can help businesses:
- Achieve revenue goals
- Provide better customer experiences
- Strengthen alignment between marketing and sales teams
- Enable better targeting for messaging
What is Total Addressable Market (TAM)?
The addressable market (TAM) is the subset of the total market that a business can realistically target and serve. TAM helps businesses to identify the size of the addressable market, the potential revenue that can be generated, and the competition in the market.
Understanding your TAM enables you to apply estimates of effort to place on certain aspects of your product roadmap, and evaluate which customer segments offer the biggest business opportunity for your organization. TAM also provides visibility into how much room your organization can grow, and provides a gut check for the revenue goals you’ve created for the year.
How To Calculate Your Total Addressable Market
There are a handful of ways you can go about identifying your TAM.
The first approach is top-down, where you can leverage free or purchased industry data from leading analysts like Gartner or Forrester to see which “quadrant” your business falls within, and how large of an opportunity your subsection may be. Please note that like many types of product marketing research, this is not a comprehensive approach. Analyst research may not reflect exactly how niche your service or product is, and can quickly become outdated if you’re in an industry that evolves rapidly.
You can also take a bottom-up approach to your TAM research. This approach is slightly more customized to your individual situation and is a quantifiable approach based on your sales and pricing data. HubSpot recommends the following steps:
- First, multiply your average sales price by your number of current customers to find your annual contract value.
- Multiply your annual contract value by the total number of contacts in your database.
- This will yield your total addressable market.
The total addressable market will help validate the revenue goals you’ve laid out for your marketing and sales team. It will also help you build the framework as you detail your ideal customer profiles (ICP), and subsequent segments and cohorts for ongoing sales and marketing tactics.
What is Ideal Customer Profile (ICP)?
The ideal customer profile (ICP) is a detailed description of the target customer that a business wants to attract and serve. It’s a detailed overview of characteristics like budget, revenue, industry, geography, and product and service limitations that act as guardrails for your sales team to identify the most qualified accounts that fit your organization.
The ICP helps businesses to focus their marketing efforts on the most profitable and valuable customers, rather than trying to target everyone. By identifying the ideal customer, businesses can tailor their messaging, products, and services to meet their specific needs and preferences. This approach can result in higher customer satisfaction, retention, and revenue.
How to Create Ideal Customer Profiles?
Creating an ICP involves a thorough analysis of the market and the target audience. Here are some steps Hubspot recommends for creating an ICP:
- Build the data foundation: Do the contacts and companies in your CRM have the most up-to-date and accurate information? You’ll need to collect complete firmographic and technographic data to ensure accurate reporting on who is moving through your funnel to develop your ICPs.
- Define success criteria: Success is defined differently across every organization. Are you looking to reduce churn? Increase revenue? Start by defining what’s most important to your organization so you can assign the appropriate KPIs for measurement. For example, if reducing churn is your goal for 2023, set KPIs for average customer lifetime value.
- Identify best-fit customers: Start assessing anecdotal feedback like insights from your sales and customer success teams to get a sense of who they dub the most successful customers. This is not a comprehensive picture of who your ICP is, but will help validate other findings used to complete the analysis.
- Conduct your analysis: Analyze your findings. Are there patterns between which companies in your CRM that have the highest customer lifetime value and what your field and customer success teams deem as the best customers? Maybe you see that the highest lifetime value are organizations between 500-1000 employees, in the travel industry, based in the United States. Is this who your sales team also feels most comfortable engaging with?
- Outline your ICP: Based on your findings, create general statements about who your ICP is, including characteristics like industry type, employee count, company revenue, and technology used within the organization.
Looking Back from Last Year to Present: Is it Time to Reevaluate?
Creating your ICPs and calculating your TAM aren’t one-and-done tactics. It’s essential to reflect on lessons about your defined ICP and TAM on a quarterly or annual basis to continue learning more about your audience, and being able to craft content that continues to resonate with them.
For example, did one industry move through the pipeline faster than others? Is there a particular region more apt to make a purchase?
Reevaluating your TAM and ICP isn’t just helpful for marketers and inbound, or for sales team and outbound. It’s also a way to ensure alignment with the product team to identify and prioritize features that can propel overall company growth. Think of it as a gut check: is everyone moving toward the same goals?
One approach to documenting your ICP is to break down your TAM research into smaller cohorts based on industry and headcount. Assess where your biggest and most frequent wins were. Which of your current customers had or have:
- The shortest sales cycle?
- Lowest customer acquisition cost?
- Highest customer satisfaction?
- Largest number of renewals?
- Most upsells and expansions?
- Most referrals?
- Lowest churn?
- Lifetime value?
Are there patterns between customers who fit these criteria?
- Geo-location – where are they based, and are they local, regional or national?
- Company size – how many employees do they have?
- Business area – is there a pattern of top-closed industries?
- Budget – how much do they have allocated to products like yours?
- Decision-makers – which job title typically makes the buying decision?
- Objectives – what do they want to achieve as a business?
- Use case– what problem is your product solving for them?
Do you have the visibility to get even more granular? Are there individual journeys you can follow to uncover:
- How responsive are they to inbound or outbound communications?
- What is their preferred channel of communication?
- How frequently do they reach out to your customer success team?
- How often are they on your website?
Should you make any changes to correlate with your findings?
Understanding your ICP is one way to help personalize marketing efforts and prioritize leads. Focusing energy on prospects and leads that fit your framework of a viable lead can mean faster time to sale, and lower customer acquisition costs.
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