Understanding your addressable market is critical at every stage of a startups life, whether just starting out and convincing a VC to make an investment, building books of business for the year ahead, or even in evaluating the revenue potential for new opportunities. Despite this, truly mapping the market is something we all find challenging.
In this article, and associated webinars and presentation, Harrison Rose, Notion Expert (CEO of Goodfit and co-Founder of Paddle) outlines the why’s and how’s of market mapping.
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Setting the scene
Our addressable market is critical to the startup journey. Whether that’s in go-to-market planning, evaluating new business opportunities or convincing investors we’re operating in a space worth investing in.
Despite this — it’s something people really struggle with - investors included.
So in this article we are going to simplify what we mean, why it's important and how to go about it.
What do we mean by mapping the market?
When we founded Paddle back in 2012 people only really talked about the concept of your “total addressable market” your TAM. In more recent times, people are increasingly talking about TAM, SAM & SOM.
The biggest circle is your “total addressable market.” This is the total possible market demand for a product.
The SAM or Serviceable Addressable Market is a subset of the TAM that the company has a product fit for today, who can use their product immediately, and who they are able to sell to and service.
The SOM or Service Obtainable Market is the proportion of the SAM that a company can realistically achieve, or they are prioritising …. typically given your limitations of resources, presence of competition, etc.
I recommend people spend their time on the SAM, within that you should prioritise further, but the SAM is the most important.
Why? If you’re operating in a massive TAM but none of them can use your product - it doesn’t really matter. Now, while it’s important to share a TAM with the investment community, we don’t actually have a product for these folks right now, don’t intend to target them for the foreseeable, etc. So our understanding of them can be limited.
Folks often think of market mapping as finite, but it’s a spectrum. Different levels of detail, confidence, depths of insight, even investment vary and influence how close you get to truly mapping your market.
An understanding of the TAM, market and industry you’re working in is important, but a high-level understanding of this is appropriate in my opinion. Whereas a focus on the SAM, i.e those who can use your product today, are those we want a deep understanding of.
So why do we map the market?
We map the market to understand the size of the business opportunity you have ahead of you, i.e. how much revenue potential is there in the SAM you operate in today. This is critical and something never to lose sight of and ask yourselves, if we achieve a significant market share, maybe 10%, or in applying some historic funnel performance, where do you end up in terms of revenue? Is this high enough to sustain the company over the next X years? Or until your next milestone?
I often work with early stage companies, who build a great product for a narrow audience and see them freak out that there are only 2000 companies globally that meet this narrow criteria, when in reality, they have 3 customers today, and 20 months of runway!
In this instance I say, “that’s great, go out and win 10, 15, 30 of them and then raise your next round!”
Take comfort in the knowledge your market is big enough for your mid term needs, but may need to broaden this in future. Express that intention to existing and future investors, the SAM doesn’t need to be the biggest number in the world, right away, it just needs to be enough to sustain growth in the mid-term, provided you have coherent plans to expand it over-time.
The second reason we map the market is to understand the number of companies that are out there our team can sell too.
This directly influences our GTM approach, as we discussed a few months ago in our workshop on PLG vs SLG, which you can read about here.
If there are only 500 companies out there. It will inform how we choose to approach or attract these companies, potentially even how we price our product. If there are only 500, we might determine the best ROI for GTM efforts, or the most cost-effective way to target them is sales-led.
On the other hand, if there are tens of thousands, who understand our proposition and are actively seeking it. Perhaps PLG makes sense for us.
It can even influence pricing. If I’m selling a contract management tool to big banks and there are only 500 of them and I’m charging them $10,000 each, then I’m going to struggle to build a big business. So I need to either find a way to increase the addressable market or increase the value of the problem I solve in order to be able to charge much more.
The third reason we want to map the market is to be able effectively prioritise who is most likely to buy.
This is something we ran a webinar on a month or so ago, that you can see here: Maximising Sales & Marketing ROI through propensity to buy scoring.
A thorough understanding of the SAM is critical for prioritisation. For example, if there are 10,000 companies in my SAM, but I only have visibility into 3,000 of them. Then even if I am prioritising those 3000 companies really effectively, chances are that there are companies within the 7000 I don’t have visibility into, which are demonstrating a higher propensity to buy than the 3000 I have visibility into today.
Last but not least - we want to map the market to align our teams around a common set of accounts & contacts to target.
This last point is critical - If sales & marketing are clear on who we’re targeting and are pointed at the same accounts & contacts, you should see the greatest results.
At Paddle whilst I was running sales there, we had BDRs running email at a set of accounts & contacts, the same contacts we followed around on paid social with the same messaging. Those accounts & contacts which engaged with a marketing touchpoint, were 2x as likely to reply to a sales rep’s email. This shows the real power of alignment.
What founders think investors want. And what they actually want…
This issue is normally driven from founders, and is a misunderstanding between what founders think the investors want, and what they actually want.
Founders often feel they need to put a huge $$$ figure in front of investors with regards to their addressable market for them to consider investing in their company. This is not strictly true, or at least not that simple.
Sure - the investor needs to believe your business is capable of growing into a very large business for them to get a return on their money. But a reasonable level of TAM understanding will deliver this.
In my experience, what really gets investors excited is an incredibly deep understanding of the profile and number of companies you plan to sell to between now and your next fundraise.
Paddle sells payments to software companies
Paddle’s strongest value proposition is helping software companies sell internationally.
If I can demonstrate to an investor that within the huge TAM that is software or SaaS, there are 20,000 software companies globally with a self-serve checkout, >20k MRR and we believe that 4,000 are those who have the highest likely to buy right now, as they have non homogenous web traffic above 30%, while operating in a single language and currency.
We can then list each and everyone one of those companies, where they’re based, and articulate the team we plan to build (with their investment) to capture them. In my experience, VCs will be delighted.
Better yet, I can say these 4000 companies are our focus initially, getting us to point X in revenue. Following this, there’s a further 8,000 companies who are selling self-serve checkouts + invoicing customers. These customers have pains A, B, C. We’ll be ready to serve them in Quarter D. Product dev is at point E, and will be ready by F. Here’s our planned GTM approach to capture these companies starting point G.
This level of clarity and execution is what excites folks. It shows a deep understanding of the customers you’ll target today, how you’re going to win them, why you’re going to win them, and how those plans are going to evolve over-time.
A couple of examples…
Let’s now run through two examples or case studies and share their challenges
As a disclaimer, I understand this problem very well from a Paddle perspective. Yotpo, another company I grabbed at random to demonstrate the challenges.
When either of these companies try to map the market - things get tricky.
You will see false positives — companies you think should be included in your SAM, but don’t actually meet your basic criteria.
You will also see false negatives — companies who don’t look like they should be included, but on closer inspection should be.
We often call this qualifying people in or out of your market mapping.
The most common pitfall I see folks fall into is relying on industry filters. When I try to pull companies listed as “software” on LI, many of them are indeed software companies, but only a % have an online checkout. This means they aren’t serviceable to Paddle today so these are false positives.
There is also a statistically significant portion that don’t label themselves on LI as software companies at all. So by using industry filters we would have missed these during the mapping.
You can see the false positives & negatives that have come about as a result.
On the Yotpo side: in eCom, in order to avoid the reliance on industry filters, folks often try to use technographics to map the market.
For example, I want eCom, so why don’t I just pull any company using Shopify?
Sadly this doesn’t work either.
Tonnes of false positives — folks using shopfiy to sell the odd t-shirt, not an true eCom business.
Tonne of false negatives — different tooling or homegrown solutions that would all be missed.
Solutions for mapping your market
Discounting humans for now (where the main challenges surround scalability), sometimes you can work with aggregators to do a better job of refining your market.
At Paddle at one point we only scraped companies from the likes of G2 and Capterra - we used them as a reference for our market, seeing higher qualification rates of self-serve software companies than other sources.
A better example is Easol - a company in the Notion portfolio offering an all-in-one platform for managing experiences……think festivals, events. They could scrape events under TripAdvisor and see higher qualification rates than if they pulled from other sources. Mews in Notion portfolio I think experimented with this too - selling into hotels.
You can see how pulling an account from this aggregator for someone like Easol or Mews produces a high qualification rate and does a better job of mapping the market for them than elsewhere.
Alternatively, with Custom Models, and enough labelled data you can build probabilistic models which predict whether a company is a good fit or not. Models tend to work well in industries with pre-conditions, where usually you’d need a human to identify said conditions.
What we’re doing is called “classification” - determining if something is a qualified fit or not.
NB. There is a fine line between qualification and prioritisation — be careful to not confused the concepts.
If you feel your reps can go on a website and identify who is good vs. bad, text based machine learning models seem to work well.
I’m no data expert but the TL:DR on how this is done is as follows. Start by pulling a bunch of domains, collecting text on each (see website, LinkedIn description etc) and labelling them as a fit or not. We use this labelled data-set to train a model, which once trained can spit out a probability as to which domains (which you’d feed the model alongside the text collected) should be qualified into your market mapping or not.
Some new tools are emerging which help with this like MonkeyLearn, or we’d be happy to help you with this over at GoodFit.
So what does good market mapping unlock? And is it worth it?
If we do manage to map the market using some of the above techniques.
How a lack of market mapping and sizing caught me out.
Over the first five years at Paddle, we had grown at 300% YoY selling into independent mac software companies and we were on a roll.
Around 2012, when Notion invested, we realised we couldn't keep scaling with the same no. of reps. Our sales team was maybe less than 10. So we planned a big increase, more doubling our sales capacity.
Halfway through that process, having committed to a financial & hiring plan, we realised there weren’t enough accounts out there. Yikes!
We knew we were operating in a small market — but we didn’t know when we were going to exhaust it as I hadn’t effectively mapped our market.
We had to make a rapid shift towards B2B SaaS and evolve our entire product roadmap / product line to cater for them as well as our entire GTM… different profile, call structure, discovery etc.
In short, the worst year of growth ever.
The takeaway. Without visibility into your SAM you can’t identify when you’re going to run out companies to sell into, or strategically plan how to evolve this over-time.
Don’t make the same mistakes!
PLG vs. SLG Needs?
I often hear questions around how mapping the market requirements differ dependent upon your GTM motion. For me it definitely influences things, as well as what stage you're at.
On the stage of business side - as mentioned — if you're simply finding your first 3 customers your focus should be in going out and winning them! Ensure your market is big enough for your immediate goals, and then we can expand who we’re going after strategically over time.
But, when it comes to your GTM motion.
On the Sales-Led side, at some level of team size & sophistication you build books of business, or assign accounts to specific reps, often based on region or size of account.
If this is the case - a granular understanding in what accounts are out there, and how many we have available to us to distribute is critical. We even want a deep understanding of each account to effectively distribute and prioritise those most likely to buy.
If I’m spinning up a new territory, I need to know the revenue potential in the region. If planning headcount for FY23, you want to ensure there are enough accounts out there to feed reps. So, you need that level of granularity.
On the product-led side, there are also clear benefits to mapping your market.
As always, we want to know the size of opp, how many accounts are out there and maybe we want to align our teams around a specific set of companies who are most likely to buy.
However I do feel in some cases there’s less of a granular understanding needed.
If you are selling an app that is applicable to a very broad range of companies, and the experience will be completely self-service, then you can probably get away with running your paid social at quite generic audiences for example’s sake.
You would probably see better ROI if running ads at incredibly narrow high converting audience but there is a cost to mapping the market and gathering a bunch of data on those companies rather than relying on the more blunt industry filters.
Ultimately mapping your market isn’t finite. It’s not a yes/no. Instead you have levels of depth and sophistication you can get to in the mapping. And you need to determine whether the ROI on the more specific targeting is there. i.e does the cost to gather more intelligence on these companies improve funnel performance such that it’s worth the investment. That will depend on the business. For some it will, others it won’t.
A good example is Paragon, an iPaaS solution, which helps companies with integrations.
In theory they could target any tech or software company via paid media, all of us have integrations. But by mapping the market of tech companies, building an understanding of their existing integrations, and an understanding of who owns integration in a business they can run all paid social at a very narrow set of accounts that line up directly with the integrations they support, to a narrow set of decision makers and the ROI on their paid ads is through the roof in doing this.
Lastly, think about what level of depth is needed for your business based on stage & GTM motion.