I was recently a guest on Whitney Cole’s “The Mission Maven” podcast. We had a fantastic discussion on why Total Addressable Market (TAM) is important for healthcare marketers. On the podcast, Whitney and I talked about the math behind TAM, but without visuals it was hard to get into a lot of details. So, I thought I would write this companion piece to go alongside the podcast.
I still remember the day that I finally sat down to do a market analysis for the Health IT company I was at the time. It was years ago, but that day forever changed my perspective on marketing to healthcare providers. I say “changed my perspective”, but It felt like a punch to the gut.
In the months leading up to that day, I had become increasingly frustrated at the declining numbers of our marketing programs. Our conversion numbers were getting worse, our cost-per-lead was climbing steadily and the quality of the leads we were generating had hit new lows. We tried changing our marketing mix – more adwords, less print advertising, targeted cold calling, different email designs – but nothing was really working.
There was a growing concern from leadership, so I analyze the market to get a better handle on the situation. About halfway through that analysis, I felt like I had been punched.
Total Addressable Market
I decided to do a thorough analysis of the TAM for the specific product which the company sold to hospitals. Here’s what I found at the time:
- Total number of hospitals in the US = 5,700
- 6-24 beds = 402
- 25-49 = 1,164
- 50-99 = 991
- 100-199 = 1,063
- 200-299 = 582
- 300-399 = 348
- 400-499 = 192
- 500+ = 266
Since the product was targeted at hospitals, the TAM was 5,700. Admittedly this number was smaller than I had realized. Up until that point I had always thought there were 10,000 hospitals in the US. Clearly I was wrong.
Serviceable Available Market
TAM represents the total size of the target group that you are pursuing, in this case hospitals. However, not everyone in the TAM can actually be serviced by a company or product. That number is called the Serviceable Available Market and represents the portion of the TAM that your product/company can actually service.
At the time, the product I was trying to market was only economically viable for hospitals that were 100+ beds. So the SAM was only around 2,500 hospitals. This was much smaller than I realized.
…and then things got worse.
Serviceable Obtainable Market
TAM and SAM are what I call “pie-in-the-sky” market numbers. Both represent the utopia where everyone possible buys your product. Of course that’s not realistic. That’s why we have a metric called Serviceable Obtainable Market or SOM.
SOM represents the percentage of the market that can realistically be achieved by your company. It factors in competition, product churn, etc. You have to be brutally honest to calculate SOM. You can’t have rose colored glasses on.
So taking the SAM, I eliminated hospitals who we could not realistically sell to:
- % of hospitals that will never buy our product (because they don’t believe in the tech/approach) = 5%
- % of hospitals that will be in financial difficultly in a given year = 1%
- % of hospitals that will be in merger talks in a given year (and freeze new purchases) = 2%
- % of hospitals that where the head of the target department is <1yr on the job = 3%
As Marketers, we have to accept the fact that not everyone is going to buy. Some just do not believe in the technology or the methodology that your product/service represents. They will stick with the status quo no matter what. We also have to accept that anyone that is still in the first year of their position is unlikely going to make a major purchasing decision. That’s definitely a generalization – there are exceptions, but in general I believe most people who are new to a role tend to take a year before making major changes.
So right off the top, 11% of the SAM is gone, leaving only 2,180 hospitals. That was gut punch #1.
Punch #2 came when I factored in competition. At the time, there were 4 primary competitors in the product category. One was a giant (50% market share) and there were 4 other smaller competitors (including the company I worked at) that had the other 50% combined. Together, all the competitors, had carved out about 40% of the market, leaving 60% as greenfield.
- Greenfield Market = 60% of remaining SAM = 60% of 2,180 = 1,308
- Competitive take-out Market = 87.5% of saturated Market = 87.5% of 872 = 763
The final gut punch came when I factored in the average life-cycle of the product category. The product I was marketing had an average life-span of 4 years, meaning customers tended to use the product for 4 years before entertaining the idea of switching to something/someone else. This is a critical factor many Marketers overlook.
So, for the Competitive take-out market, only 25% of would actually be potential buyers, leaving only:
- # of Competitive take-out opportunities in a given year = 25% of 763 = 190
Bottom line, for the year, there were only 1,308 + 190 = 1,498 potential buyers. Of that, we could realistically win 20% market share (which still represented 8% more share than our historical average), which meant our SOM was 300.
When I arrived at this number, my stomach hurt.
Change in Marketing Tactic
This analysis completely changed my thinking and I spoke about this on Whitney’s podcast.
It turns out that hospitals are what I call a “defined market”. It is possible to buy or build a list of all the hospitals in the US and get their contact information. Even better, if you are targeting department heads, most of them are listed on the hospital websites (or you can buy a list). Basically in healthcare you have a named list of targets.
This is very different than undefined markets like: car buyers in the US, home buyers or even industrial air conditioner buyers. In those markets there is no list of potential buyers that you can buy or build. You have to market to a target demographic and hope some will put their hand up and identify themselves as a potential buyer.
Ford Motor Company, for example, would do anything to have a list of potential car buyers in the US for 2019. In healthcare, you can easily build a list of Medical Directors or the heads of Cardiology Departments at 100+ bed hospitals. It may take some time and elbow grease, but it’s possible.
This lead to the question – if we name each person in our target audience, why are we using broad-based, mass marketing tactics to reach them?
Think about it. Why spend thousands of dollars on Google Adwords to get someone to raise their hand when you could send all your targets a compelling offer via direct mail or email? Why advertise in a general business publication when you could go to a specialized publisher that focused just on your targets?
And that’s what we did. After doing the analysis we stopped all mass-market techniques and focused instead, on one-to-one tactics. We started using highly personalized email campaigns, high value direct mail, retargeting with more compelling ads, attending specific local conferences where buyers would be, and yes, even focused cold calling. After 12 months, we had quadrupled the number of quality leads to the Sales team.
Do the Math
I would strongly encourage everyone in Health IT to do their own market analysis. It is a very worthwhile and enlightening exercise. The key is the last part where you take a realistic look at the market share you can achieve. TAM is a great metric to throw out to potential investors, but it is SOM what will pay the bills.
Do the math and you will thrive.