The percentage of all beverages
consumed daily
around the world
is how Coca-Cola thinks about its TAM.
2.2 billion of 65 billion daily beverage servings.
And even that massive number is just 3.4% of the total.
After 133 years, Coca-Cola has come nowhere close to exhausting its TAM. That’s true of the corporate parent of all those brands, but what about the individual brands? What’s the TAM for Fanta Grapefruit? Has Fanta Grapefruit reached just 3.4% of its potential market or is it at 94% penetration?
DTC likes to borrow concepts from SaaS e.g. ROAS, CAC, LTV, Payback Period, Churn, so here’s another one to consider: “TAM Exhaustion.”
In SaaS, TAM Exhaustion is the concept that the market for the product is saturated. All the potential customers already know about the product and have already bought so growth slows, then plateaus and then eventually declines as churn kicks in.
Is there a similar concept for brands?
The team at Provenance thinks so. They are savvy consumer brand investors and one of their core insights is brands have ‘tribes.’ These tribes are set early in the brand’s life and are very hard to change once set. Brands attempting to expand beyond their tribe can create multiple problems for themselves. The tribe may not like the new products aimed at the new customers, so they don’t buy. Worse, the tribe may not see themselves in the new customers, so they abandon the brand. Acquisition can get more expensive as the brand doesn’t resonate with the new group and so more impressions are needed to build awareness and then get conversions. Management’s attention, time and efforts are focused on the new thing thus neglecting what the tribe wants. And capital is spent building supply chains and inventory in the new products.
I think all this rings true based on brands I have seen up close as well as my own personal consumer experience with brands.
If it’s true that tribes are locked in early and difficult to change and TAM Exhaustion is possible, you have two questions to answer.
#1 What are the signs my brand is reaching the limits of its TAM?
Your TAM isn’t just a number of people; it’s also their predisposition to buy which is the combination of desire and ability to pay. So we are going to look at metrics that can reveal both measures. To do this, we need to understand who our best customers are and how newly acquired customers move through our customer pyramid layers over time. See my previous post on this.
A healthy balance in a scaling brand would be repeat customer buying remains strong while new customers move up the pyramid layers at a good rate. Let’s look at each.
Test 1 looks at your best customers layers to see if average sales over time is growing, flattening or declining. If the trend is flat, you may be bumping into their predisposition to buy from you. If it’s declining, you may be alienating your tribe.
Test 2 looks at how your newest customers are moving up your customer pyramid over time. Are you converting new customers to repeat and high value customers at the same rate as you used to? You should expect some degradation as you have already acquired the people your brand most resonates with and this will be more pronounced with newer brands. A big change in these rates would indicate you are acquiring less valuable customers at the edges of your TAM. What constitutes “a big change” is obviously subjective.
Test 3 looks at your customers’ reactions to your newest products. If your best customers are buying your newest products and this is accretive (i.e. you aren’t simply cannibalizing), you may have room to run in your TAM. But if your best customers are not buying the new products and their average sales is going down, you may be alienating.
Are new customers buying your newest products or your hero products? More importantly, what is happening after they buy? Are they developing into high value customers at the same rate as they used to? First purchase product can be highly indicative of the type of customer they become. What you don’t want is alienating your best customers combined with acquiring lots of new, but lower value customers. That would be a sign you have wandered too far away from the TAM.
Test 4 looks at CAC. As you move further out into the TAM, two things happen.
- Awareness and conversion get harder. Your earlier customers were highly tuned to your brand and products and positioning. What you offered was important to them and they were more likely to notice and buy. As you get further out into your TAM, you are trying to reach people who don’t care as much and so require more impressions to build awareness and ultimately conversion.
- You have to reach a lot more people.
A third thing will often happen at this point. As the number of people reached increases and the conversion rate declines, brands will often dilute the marketing message. Super special pants for this particular type of person doing this particular thing becomes ‘pants.’ Sure, more people need pants, but you are now undifferentiated in a sea of options.
Broader audience plus more impressions needed plus lower resonance will inflate budgets and increase CAC’s. Again this is to be expected and it’s hard to parse what are sustained CAC increases and what are temporary blips from seasonality, the media partner and your own campaign management. But if you are seeing CAC’s get higher faster and stay higher, you may have a strong signal that you are at the outer edges of your TAM.
#2 What should I do about it?
This is gut wrenching decision time for founders because all the actions carry real risks. They may not be one way doors Bezos describes, but they have the potential to make or break your brand and certainly require huge allocations of your time, efforts and capital.
- Dramatically expand the TAM with a big new category of product. I am not talking about offering your hero product in red. You’ve already been beavering away at launching adjacent products and variations. Porsche launching SUV’s with the Cayenne and Apple introducing the iPod are what I am talking about. Both seem so obvious in hindsight, but both were huge bets for their companies at the time.
- I think this strategy is the default choice of every founder. In fact, this strategy is often deployed way too early in the brands’ life, well before the brand has hit TAM exhaustion.
- When it works, it looks obvious and genius. But often it fails, which we rarely hear about, and companies can stagger under the effort, capital intensity and deterioration in the core business.
- Become multi-brand. Going back to Coca-Cola, this is what they did.
- Accept your TAM and focus on distributable cash.
- I think this is the hardest choice for most founders. As a class, entrepreneurs tend to dream big: ‘we can be a billion dollar brand!’ So it can be hard to give up on those daydreams. Our products also represent our visions. Our egos are on the line. It’s hard to accept that maybe not everyone or even that many people, really want our beautiful things. Cognitive dissonance kicks in and it can be easier to ignore than accept reality.
- Creating the next mass appeal brand is super hard. Despite our desires, it’s far more likely we will develop a decent, but not massive tribe for our brand. If that’s the case, you can always lean into maximizing the cash distributions to build wealth or use those distributions to subsidize brand #2.
If you think you have hit your TAM’s limits and are struggling with these decisions, reach out. I help brand leaders get to profitability, cash generation and wealth creation.