How do you calculate the share of active buyers in your market?

You no doubt have a clear picture of who your ideal customer is and what your company's target audience looks like. That is important knowledge, but it is not the only insight you need to run a successful business.

It is far more interesting and useful to know who the active buyers in your market are. After all, not everyone in your target audience is currently making a purchase. In fact, only 5% of the market is looking for your product or service right now.

Who are these potential customers? And above all, how can you reach this specific group so they actually buy your product or service? That is why it is important to know the share of active buyers in your market.

TAM, SAM, SOM

Most of your B2B target audience is not looking for your solution at the moment. Not because your product or service is not interesting enough, but simply because they have no plans in that direction.

To find out who the active buyers in your audience are, you divide the market into 3 levels: TAM, SAM and SOM. This gives you an increasingly clear picture of your real target audience.

TAM (Total Addressable Market)

The Total Addressable Market (TAM) is every company in your market. You do not need to take limiting factors such as competition, budget and location into account. You calculate your company's TAM with the following formula:

Total number of potential customers x Annual revenue per customer = TAM

As a worked example, let's take a company that develops a software tool for home care organisations.

Potential customers: There are 4,620 home care providers in the Netherlands (source: Zorgkaart Nederland).

Revenue per customer: The company charges a subscription price of €50 per month. That is €600 per year.

TAM calculation: 4,620 x  €600 = €2,772,000

The TAM gives you insight into the maximum market potential.

SAM (Serviceable Available Market)

When calculating the Serviceable Available Market (SAM), you do take limiting factors into account. This is the part of the TAM you can actually reach. To calculate your SAM, use the following formula:

Number of customers in TAM x Percentage of reachable market = SAM

The software company in our example uses its tool to support home care organisations that offer home dialysis. There are 453 of these organisations, which comes to roughly 10% of the market.

SAM: 4,620 potential customers x 10% = 462 customers x €600 = €277,200 per year.

The SAM gives you a more realistic picture of your market.

SOM (Serviceable Obtainable Market)

The Serviceable Obtainable Market  (SOM) is the part of the SAM you can actually win, based on your strategy, capacity and competitive position.

According to a competitor analysis, the company making a software tool for home care can reach at most 10% of the market in the first 2 years. The formula is then:

SAM x 10% = SOM

SOM: 462 x 10% = 46 customers x €600 = €27,600 per year

This is your most realistic achievable revenue in the short term.

Why you want to know your share of active customers

If you know how big your active B2B target audience is, you can respond to it much better. Where you used to fire off shots at random, the insights from TAM, SAM and SOM let you work in a far more targeted way. For example, it gives you two big advantages:

Better allocation of your marketing budget

You want to spend your marketing budget as effectively as possible. Of course, that means reaching the group of active customers, but also being visible to the other 95 per cent of your audience. With this knowledge, you can allocate your marketing budget better: how much do you invest in winning over active customers, and how much do you reserve for making your inactive prospects aware of your brand?

Setting realistic growth targets

You know what is achievable and avoid overestimating or underestimating your market. We regularly see business owners estimate their growth targets too optimistically or too pessimistically. When that happens, the consequences can be unpleasant. For example, you target the wrong audience, miss opportunities or waste marketing budget through a lack of knowledge. You prevent this by having insight into your active B2B target audience.

How do you calculate the share of active buyers in your market?

Calculating your active buyers helps you use your marketing capacity much more effectively. To do this, it is important to know your replacement rate. We explain how it works in 3 simple steps:

1. Determine how many companies there are in your market

Find out how many potential customers there are in total. In this example, we take a manufacturer of vacuum machines for the hospitality sector. In the Dutch-speaking hospitality market, there are 5,000 ICP organisations.

2. Calculate the replacement rate

To calculate the replacement rate, you need to know after what period your product is economically written off. For vacuum machines for the hospitality sector, this is 10 years, or 40 quarters. The replacement rate is therefore 2.5% of the ICP per quarter.

3. Do the final calculation

Now that you know the number of companies in your market and the replacement rate, you do the following calculation:

Total number of companies x replacement rate = in-market per quarter

In other words:

Calculating the number of active buyers: 5,000 x 2.5% = 125

In this example, there are therefore 125 active buyers per quarter. These companies are actively looking for a new vacuum machine.

What should you watch out for when calculating your B2B target audience?

Calculating your B2B target audience really is not complicated, but you do need to stay realistic. So make sure you do not fall into the following traps:

• You are not clear about which companies belong to your target audience. As a result, you cannot properly work out how many potential customers there are, and you base your calculation on the wrong figures. So make sure your customer profile is clear. You can, for example, request figures from trade associations or Statistics Netherlands (CBS).
• You use outdated data. What was current six months ago may already be out of date. So do not assume that a report with figures from a year ago is still accurate; make sure you have the latest data.
• You do not know who your competitors are. It is good to know how many other players there are in the market. You can often look this up through trade associations or Statistics Netherlands too.
• You are not realistic about your conversion rates. There is a big difference between a lead and a successful sale. So be critical and do not make figures look better than they really are.

How do I determine what a potential customer may cost?

Once you know how much a customer brings in and how many active buyers there are, you can determine what a customer may cost you. You do this by calculating Customer Lifetime Value (CLV) and comparing it with your profit margin. The starting point is that you invest at most 20 to 30 per cent of your CLV in acquiring a new customer.

CLV calculation: average purchase x number of repeat purchases per year x average customer lifespan in years = CLV

As a worked example, let's assume a customer brings in an average of €600 per year. A customer stays for 3 years on average, which means a potential customer is worth €1,800. If you invest at most 30% of this amount, a new customer may therefore cost €540.

Calculating your own market share

Calculating your own market share is not complicated. If you have already worked out your SOM and you know how many customers you currently have in this market, you can use the following formula:

Number of customers / SOM = result x 100 = market share as a percentage

As a worked example, we again take the company that develops a software tool for home care. They currently have 30 customers. The calculation for market share looks like this:

30 / 46 = 0.652 x 100 = 65.2% market share

This way, you can quickly see how much growth is still possible for your business. And it is always good to know where your organisation currently stands.

Demand Gen & Demand Capture to reach your target audience

Now that you know who your active buyers are, you naturally also want the answer to the next question: how do you reach your B2B target audience?

You do this with two different marketing strategies:

• Demand generation
• Demand capture

By combining these two strategic marketing approaches, you ensure a steady flow of new customers.

Demand generation

With demand generation, you focus on creating interest in, trust in and awareness of your product or service, before the customer actively plans to buy. That may sound the same as lead generation, but the big difference is that demand generation is far more effective.

The main goals of demand generation are:

• Creating and sustaining demand.
• Building a long-term relationship as an authority in the market.
• Greater brand awareness, better leads and higher conversion because customers choose your product or service of their own accord.

At Partout, we use demand generation too. A good example is the thought leadership posts Jeroen creates. In them, he shares his view and knowledge on a particular topic. We then promote the posts on LinkedIn, because that lets us target our ideal customers.

Demand capture

With demand capture, you actively respond to existing demand by reaching potential customers who are already looking for a solution. By being visible, you focus on the 5% of the market that is planning to buy a product or service like yours at that moment.

The main goal of demand capture is direct conversion, such as a purchase or a completed contact form. For this, you use marketing tools such as SEO and SEA.

Reach your ideal target audience

By gaining insight into your TAM, SAM and SOM, you know exactly who your active buyers are and how much there is to gain for your business.

This helps you to:

• Steer growth in a more targeted way.
• Use your marketing budget more efficiently.
• Make better strategic choices.

Want to know exactly how much revenue is available to you right now? Get in touch with Partout and discover together how to map and reach your active buyers.