In case you missed it, read part one: What Founders Think Investors Want to Hear Part 1: “No Historic Sales & Marketing”.
I’ve written a lot about Total Addressable Market (TAM) both in this blog series and on ASG’s broader blog. Today’s blog will touch on TAM, but in a different way than you’d hear from a typical investor.
When I’m on calls with CEOs, I often get pitched as to how versatile their SaaS product is. “Our product can be used in government, healthcare, energy, professional services (PS) and entertainment.” CEOs think I want to hear that because when you think about that statement as it relates to TAM, you have to see that their product can service 97% of the total GDP. A lot of TAM means a lot of opportunity. That all sounds good right?
What I hear reading between the lines
Maybe. What I hear from founders is, “we have zero go-to-market focus.” But zero focus is a bad thing because it results in wasted time and money, two things we don’t like wasting. Having a product with the capability to service multiple end users or customers can be a real advantage, but you can lose that advantage when you don’t prioritize.
As businesses scale, or revenue increases, you can take more risk in targeting new customer bases. There is no reason to do that in the early days (<$10m revenue) because a narrower focus allows you to become more entrenched in that smaller market segment.
Think about a pie (desert, meat or pizza, any of them works). There is a fixed amount of pie available. When starting your business, you can either pick a pie that is massive and say, “Well if I just get 1% of a slice, and the pie is huge, that’s still a big number!” Or you can say, “I’ll pick a small pie but want 50% of it.” As you begin to reach either goal, which do you think gives you the greatest leverage to expand into another pie and have a slice over there? The 1% or the 50%? The truth is, it probably depends, but realistically it will be the 50% pie. Let’s look at a real life example.
Niche market leaders expanding in the real world
Nike originally started just as a running shoe company (P.S. if you haven’t read Shoe Dog by Phil Knight, go give it a read it’s highly entertaining). They could have focused on all activewear, but decided to create the absolute best competitive running shoe possible. As their market share grew from 1% to 10% in the running shoe market, they “ran with it” and doubled down to create an even better version with the goal of being the best running shoe company.
This goal got one in every two Olympic runners to wear Nikes. From there, they branched out into other types of shoes and eventually became the brand we know today for all activewear. Another company called Lululemon has followed that same path (then Allbirds and countless other businesses).
Leverage experience to expand into other markets
Being the best in your market segment allows you to eventually leverage that experience and brand awareness to expand into other markets. Being thoughtful, methodical and focused around the HOW and WHERE you want to bring your products to market can often get you further than you would’ve gone if you didn’t have a plan, as well as doing it 10x faster with little risk and a higher chance of success.
So the next time you’re on the phone talking about how many endless opportunities your product has, consider mentioning that while that may be true, you’ve chosen to focus your efforts on capturing the X & Y markets. That’ll show them (and me) you mean business and you’re building a business that has way more value than just what shows up on the Profit and Loss (P&L) statement.