Each new fiscal year requires an operating plan and that should underpin an organization’s go to market strategy – market opportunity. The tone for that annual plan is highly influenced by the revenue expectations and that in turn drives profitability, dictates expenses and impacts different marketing strategies.
In large corporations the annual planning process tends to be more of a top-down approach – for example, a $10B company has to create a new $1B business to grow 10%. There are basically two options to grow: organic growth and growth by acquisition. Many organizations either do a broad brush plan which highlights the additional revenue coming from a new market entry or geography, expanding an existing product line or buying another company.
Progressive thinking B2B companies (SMBs and business units in behemoths), often use the annual planning process to approach it from a market opportunity perspective. In this mindset, the key elements to analyze are the Target Market, Technology Adoption Curve, Market Disposition and Capacity. This approach always commences with a focus on the number of companies (not contacts) and is pragmatic, as it is founded in quantitative analysis and requires strong business acumen.
Market Opportunity – Target Market
When it comes to sizing the target market and establishing the served market, all too often, companies gravitate to finding a “validated” market-sizing statistic from Gartner, IDC or Forrester and check that box as done. These companies then base their revenue estimates as a percentage of that number in their annual planning process. Granted, sizing a market is not an easy activity, but is crucial as it establishes the foundation for the organization’s financial and operating plan. So, this one step in the process can either make or break companies as revenue expectations and budgets are a function of revenue.
Unfortunately, any market sizing defined by third parties almost always needs to be reduced to be an accurate reflection of an organization’s served market. This is because the market sizing has to be reduced down to the specific use cases an organization serves, the unique differentiation it delivers, the value drivers it provides, the staffing and enablement it has funded and the customer onboarding it has invested in. By acknowledging and embracing these concepts it will increase efficiencies and the overall effectiveness of the go-to-market strategy and form the objectives of marketing.
Market Opportunity – Target Account Profile
The Target Account Profile (TAP) is a detailed description (demographic, transactional, social behavior, digital behavior and interactive behavior) of a prospect that, if engaged with the sales team, will exhibit a high probability to purchase.
The Target Account Profile is a profile or blueprint of the ideal prospect. Ideally, the criteria identified is used to shape the size of the market—i.e. narrow the market opportunity for a laser-like focus. The TAP is useful for setting organizational focus, list buys, persona, journey board and buyer behavior model development.
The TAP is derived from a thorough understanding of the business problems that the specific use cases solve.
Market Opportunity – Technology Adoption Curve
The Diffusion of Innovation, a theory of renowned scholar Everett Rogers, seeks how to explain how, why, and at what rate new ideas and technology spread through cultures or markets. The huge contribution that Rogers made to marketing occurred in 1962, and allows marketers to logically quantify the rate at which products and services are consumed in both B2B and B2C markets.
The technology adoption lifecycle model describes the adoption of a product or service according to the demographic and psychological characteristics of the target market. The process of market adoption over time is typically illustrated as a normal distribution or bell curve. The model includes five segments of adopters:
- Innovators – approximately 2.5% of the market, Innovators are typically risk takers and they understand that failure is an option in order to realize great rewards.
- Early Adopters – approximately 13.5% of the market, Early Adopters are typically viewed as thought leaders. While somewhat more cautious than an Innovator, Early Adopters have tremendous influence over the Early Majority.
- Early Majority – approximately 34% of the market, the Early Majority require some level of validation before making a purchase decision. This is a critical group as penetrating this group is a requirement to 50% market penetration, and the last two segments will not be penetrated unless the Early Majority is on board.
- Late Majority – approximately 34% of the market, the Late Majority usually adopt technology after half of the market has made a purchase. The Late Majority is typically very skeptical and fear, uncertainty and doubt paralyze them from making a purchase decision.
- Laggards – approximately 16% of the market, Laggards typically tend to be concerned with how things have been done before and feel that any change will be difficult and require additional work.
A key is to establish the position of the market on the technology adoption curve. One way to do that is to review the number of players in the market and the cum of their revenues. Another is to use the yardstick of 20-25 years as it usually takes that long for 80% market penetration to be made in a B2B market (longer in B2C markets).
Market Opportunity – Market Disposition (Choices)
After the market sizing has been processed through the filter of the TAP and the technology adoption lifecycle model, it still needs to be adjusted for the Decision Choice Filter.
A Decision Choice Filter simply includes the options that are available to buyer’s in a market. Regardless of how beneficial the offering is, there are still choices available to a prospective buyer such as:
- In-House – while the prospect is in agreement with an organization on the business problem and the need for a solution (value) , they will build it internally from scratch or append an existing solution
- Choose Not to Do It – regardless of whether it seems rational to the vendor, the prospect may choose not to pursue the offering (timing, budget, etc.)
- Choose a Competitor – the prospect is in agreement on the business problem and the need for a solution (value) but they chose a competitor
- Choose Your Organization – the prospect is in agreement with your organization on the business problem, the need for a solution a(value) and will select your solution
The best way to estimate where a market is relative to their choices is to sample the target market, refine the estimates and rinse and repeat. Approaches may include online surveys, Sales Development Reps performing outbound calls, or even sponsored research.
Market Opportunity – Capacity
An often miscalculated or ignored factor in setting realistic revenue goals is the capacity of the salesforce and how it is modeled to contribute to revenue. On one end of the spectrum, a cursory count of how many sales people are budgeted (in a direct sales model) is multiplied by the assigned quota to arrive at a revenue target. Unfortunately, this task is more complex and requires the inclusion of additional factors to derive an accurate projection. Here are a few to consider:
Sales Ramp – the length of time it takes to ramp a sales person to produce at quota or above quota. Some organizations set an unrealistic time estimate for a sales rep to be fully functional and deliver revenue at 100% of target. In many organizations, the onboarding process is not aligned with hiring dates or onboarding is ineffective. In other organizations, there is a cliff (the sales rep’s quota moves form 0 to 100%) that confront sales reps abruptly, instead of a ramp (25%, 50%, 75%, 100% over time.
Sales Enablement – the sales funnel must be proactively managed to understand the stages, and requirements, of each sales stage. This includes understanding the key tasks for a sales rep to perform at each stage, the corresponding sales tools available, access to resources across the organization to address buyer needs at each stage, insight as to how to move prospects to the next sales stage. If an organization has not nailed the sales enablement process, then scaling it will not yield an efficient and effective customer acquisition process.
Most sales organizations are comprised of many types of sales reps: hunter’s, farmer’s, lone wolf’s, etc. And, the performance of most direct sales organizations most often follows a normal distribution curve. The fallout of the bell curve reveals that a small percentage of direct sales reps that exceed quota, an equally number that attain a very small percentage of their quota and the two largest segments either attain 80-100% or quota or fall in the 50-80% of quota. It is a huge mistake not to use these ratios (or something that accounts for varied performance) in calculating revenue attainment for the upcoming year.
Market Opportunity – Average Sales Cycle and Average Selling Price
Another area where organizations tend to set themselves up for failure is to simplify the assumptions around average sales cycle and average selling price.
Average Selling Price for the Market Opportunity
The average sales price is easy to calculate. It is something people naturally gravitate to but unless the sales volumes are so large it is much more effective to look at the median, mode and range to gain real insights and to create assumptions that will lead to accurate forecasts. Again, historical data can help provide estimates for the distribution around various price points. By incorporating real price points and not relying on one average price point, it will result in more accurate assumptions and that drives better annual planning.
The average sales cycle is important for a couple of reasons. First, the average sales cycle helps rationalize whether it is physically possible for a sales rep to close the required number of deals in a year that are associated with the assigned quota. For example, if a $2M quota assignment requires 20 deals to be sold and the average sales cycle is assumed to be six months, then it’s highly unlikely the a sales rep would have the physical bandwidth to reach or exceed quota.
Average Sales Cycle for the Market Opportunity
Second, the average sales cycle should include an analysis as to the specific resources that need to be allocated to an opportunity and who has what roles and what responsibility. The best in-class organizations apply the right resource to the task and this involves focusing sales people on sales tasks and off-loading tasks that are not core selling activities. In short, the capacity planning assumptions need to be realistic for a salesperson, but the lens needs to be wide enough to include all of the resources that are necessary to sell.
These are only some, albeit some key issues, of the capacity issues that will impact your go to market strategy. By acknowledging and incorporating these factors into your planning will increase the probability of your organization acquiring the number of customers required to support the growth objectives of your organization. If your organization does not take the time to plan appropriately, it will spend an inordinate amount of time imposing travel restrictions, termination of contractors, lay-offs, reduced raises and bonuses as expenses will have to be slashed to meet profitability objectives because of the revenue shortfall.
Summary: Market Opportunity
While most organizations start with a third party estimate of the market, the best in class planning companies don’t stop there since it is a huge mistake. It’s critical to reduce that generic market estimate by filtering the market based upon your organization’s target account profile (which is directly correlated to your specific use case(s). Next, determine where the market is relative to the technology adoption curve and further refine to establish a served market. Acknowledge that there are choices in the market and that not every company will choose your organization’s offering, regardless of whether it is deemed to be the best (from an internal or external perspective). Finally, incorporate the constraints within the organization that are imposed on the sales people and sales process. It is at this point that a realistic revenue estimate for the organization has been established and that accurate intelligent financial planning projections can be established and a specific marketing action plan can be created.