No company sells to "everyone". Market segmentation means splitting a market into groups of customers with similar needs, so that each group can get a fitting product, price and message. In business-to-business (B2B) markets, segments are usually built from four kinds of data:
Kind of data | What it describes | Examples |
|---|---|---|
Firmographic | Facts about the company, like demographics for people | Industry, number of employees, location, legal form, year founded, revenue |
Technographic | The technology the company uses, or does not use | Accounting software, shop system, no online booking |
Intent | Signs that the company is actively looking for a solution right now | Asking for quotes, publishing a tender, reading comparison articles |
Behavioural | How the company has behaved as a customer or towards you | What and how often it buys, how it orders, which features it uses |
Once the segments are clear, a company wants to know how big the opportunity is. Three figures are common:
TAM, total addressable market: the revenue if every company that could possibly use the product bought it.
SAM, serviceable available market: the part of the TAM you can actually serve with your product, your region and your sales channels.
SOM, serviceable obtainable market: the part of the SAM you can realistically win in a set time, given your competitors and your capacity.
Calculating from the whole market down to your share is called top-down. Starting from your own capacity, for example the number of salespeople and the deals each one closes, is called bottom-up. A good estimate checks one against the other.
Tasks 2 and 3 use Litware, a fictional company that sells cloud accounting software to craft businesses such as electricians, plumbers and carpenters. All figures are invented for teaching.
Litware splits its market into three segments. Micro firms: 1 to 9 people, the owner does the paperwork. Growing firms: 10 to 49 people, an office manager handles invoices, a tax adviser does the year-end accounts. Established firms: 50 people or more, with their own accounting staff or finance head.
Fictional figures for task 3: there are 400,000 craft businesses in the country Litware serves. The software costs 50 euros a month, so 600 euros a year. Litware's product only suits businesses with 1 to 49 people that already write invoices digitally: 45 % of all craft businesses. In three years, Litware expects to win 2 % of the businesses in its SAM.
Teacher notes
How to run it (about 30 minutes)
8 minutes: go through the table of data types and the three market figures together. Draw TAM, SAM and SOM as three circles inside each other on the board.
15 minutes: learners do the four tasks alone. To collect results, open "Use it with a class", copy the class link and read the result codes in the class results page.
7 minutes: discuss the calculations and the questions below.
Model calculation
TAM: 400,000 x 600 = 240,000,000 euros, so 240 million.
SAM: 400,000 x 0.45 = 180,000 businesses; 180,000 x 600 = 108,000,000 euros, so 108 million.
SOM: 180,000 x 0.02 = 3,600 businesses; 3,600 x 600 = 2,160,000 euros, so 2.16 million.
SOM as a share of TAM: 2.16 / 240 = 0.009, which is 0.9 percent.
Bottom-up: 12 x 8 x 12 months = 1,152 customers a year; 3,600 / 1,152 = 3.125 years. This ignores customers who cancel, so in reality it would take longer.
Common mistakes
Intent versus behavioural: learners often put "Asked three suppliers for quotes" under behavioural. Behavioural data describes how a company has acted towards you or as your customer; intent data shows it is looking for a solution now, whoever it buys from.
Technographic includes the absence of technology. "No online booking" is useful information for a company that sells booking software.
Mixing businesses and euros in the blanks. Ask learners to write the unit next to every number.
Forgetting that 2 % of the SAM is not 2 % of the TAM.
Follow-up questions
Which of Litware's three segments would you target first, and why? (Look at need, ability to pay and how easy they are to reach.)
Which assumption in the calculation are you least sure about? How could Litware check it? (For example, public business statistics for the number of craft businesses, or a small survey.)
The SOM ignores customers who cancel. How would a churn rate of 10 % a year change the bottom-up check?
Turn your favourite segment into an ideal customer profile with the ICP and persona canvas.