Let’s say your company just designed a revolutionary machine for harvesting wine grapes. Or if you don’t drink wine, then imagine the hops in your beer, the beans in your coffee or the leaves in your tea.
You arrive at your first vineyard, excited to demonstrate the speed and precision of your tractor only to find that extreme frost has destroyed the majority of the grape crops in the region meaning they won’t be in the market for new machinery this year. You’re devastated because suddenly, you have no immediate buyers.
That is exactly what investors and acquirers want to avoid. They want to know that no matter how successful your business currently is, there are still plenty of other vineyards out there.
Why does your “Addressable Market” matter?
Investors and buyers are investing in your company based on their expectation of future profitably, not current profitability.
This is where things can get complicated. If you want to maximize your profits, you’ll want a greater market share so you can better control pricing. However, if you want to maximize the value of your company, you need to be able to show that there’s plenty of market out there ripe for the picking. For example, other farmers’ grapes or land that could be converted to vineyards.
Consider the following ways you might expand the way you are currently thinking about the addressable market for what you sell:
Who are your potential customers? How is the market segmented by customer attributes, including gender, income, age and education level? Marriott has increased their company value by not only competing for market share within each of their target customer segments but by expanding to additional segments. For example, Marriott owns both Ritz Carlton and Courtyard Marriott. Ritz Carlton competes with other luxury chains while Courtyard offers competitive pricing on standard accommodations. It’s the same company but they have expanded their addressable market by focusing on different demographic segments with each of their chains.
Where are your potential customers? Success in your local market is good, but if you want to increase the value of your company, you need to show potential acquirers that you can “take your show on the road”. That’s exactly what Cirque du Soleil did, starting with a local show in Quebec and growing to an empire that has now performed for 155 million spectators across forty countries.
How do your customers think and what do they care about? For environmentalists, Toyota’s Prius is a favorite with its great fuel economy of 50 miles per gallon. Toyota markets its Tundra pickup truck, on the other hand, by focusing on towing capability and style, not on its 15 miles per gallon. Toyota has managed to design and market vehicles that address the desires and preferences of these distinct psychographic segments.
Increasing your company’s value doesn’t require you to become a household name, like Marriott, Cirque du Soleil or Toyota. You do, however, need to be able to show that there are still more grapes waiting to be picked, soil to be planted and wines waiting to be made.