The Optimal Addressable Market (OAM) is where you should focus

Tech startups and the venture capital world tend to overemphasize certain metrics and adopt terminology that then drive business practices.  One term in particular is overused in the startup world and that term is the acronym, TAM which stands for total addressable market.  The TAM is used by companies and investors to estimate the overall revenue opportunity.  The fallacy in relying on the term to heavily is that the estimated total addressable market does not take into consideration the competitive landscape and the company’s ability to reach the entire market.

When working with growth oriented companies, I find it helpful to question the leadership’s thinking and to challenge their assumptions.  So many SaaS companies have this model where they begin by establishing product market fit, then look to scale by moving from SMB to enterprise.  The TAM that they have built their models around assumes that they will penetrate the enterprise market as part of their evolution.  I like to challenge this thought process.  What if you avoided the enterprise and only focused on SMB?  Is that market big enough for you?  In almost every case, there is a compelling argument to stay away from enterprise clients.

One approach that I have found helpful in shifting the thinking for clients is to replace TAM with OAM.  OAM is a similar acronym but it stands for Optimal Addressable Market instead.  The optimal addressable market shifts from a shotgun approach to more of a laser focus.  Rather than trying to be all things to all clients, establish a clear market that your company can dominate.  Working with enterprise clients can be much more challenging than mid-market and smaller companies.  Here is a just a short list of the challenges of working with enterprise clients:

·        Enterprise client take much longer to close sales.  They tend to require more decision makers which slows down the cycle.

·        Time to implement it always longer as more people need to be involved

·        More lawyers mean more redlining of contracts and documents

·        Enterprise clients have more layers of security and complexity when trying to implement new tools

·        Enterprise clients tend to put vendors on much less attractive payment terms like net 120, so it takes longer to get paid

Yes this is a negative list and there are certainly positives of working with enterprise clients, but too few companies weigh the pros and cons.  There is just an assumption that to gain the valuation desired, a company must have enterprise clients.  When looking at the size of the opportunity a quick peak at the US Census data will reinforce my point.

Out of the 6.1 million firms in America, only 20,868 of them have over 500 employees.  The opportunity to succeed without ever touching an enterprise business is potentially much greater than the opportunity to crack the enterprise space.  Just the numbers are compelling and when you consider the complexity and challenges that enterprises create, why even bother?

The concept of establishing your OAM, does not preclude the enterprise, in fact for some companies their OAM will be enterprise only and they won’t invest the time and effort to work with smaller clients.  The key is to have the right GTM (Go to market) discussion and to align the company about where to play and how to win.