Entrepreneurs must consider many market aspects when launching a business and how their product or service can fit into the larger context. One key concept that entrepreneurs should be familiar with is the Total Addressable Market (TAM).
TAM is a crucial metric that can help entrepreneurs assess their business’s potential and decide whether it is worth investing time and resources into the venture. Let’s explore the Total Addressable Market (TAM), why it is crucial, and how entrepreneurs can use TAM to determine whether their business model is viable.
What Is Total Addressable Market?
Total Addressable Market (TAM) is the complete market demand for a product or service, signifying the total sales potential that a product or service could theoretically achieve if it secured 100% of its specific market segment.
TAM is a valuable tool for businesses as it allows them to assess the potential of a particular product or service and allocate resources accordingly.
TAM is often calculated based on factors such as the current size of the market, the growth rate of the market, the number of potential customers, and the customer’s willingness to purchase the product or service.
This metric can clearly help businesses understand their competitive landscape and identify potential opportunities. That is why TAM is an important measure of a company’s possible success and is used by many businesses worldwide to inform their decision-making.
Key Takeaways
The total addressable market, often called the total available market, is a term used to describe the complete potential value that a market has for a company;
Calculating the TAM can be beneficial in developing future marketing and sales strategies, as well as assessing the potential pros and cons of investing in a market;
One of the most common ways companies assess the potential market share they could gain is by calculating the total available market from the top down.
How to Define Total Addressable Market?
Total Addressable Market (TAM) is a measure of the potential size of a market. It determines the possible return on investment of a product or service. Some of the main components of the total available market include market size and growth rate and knowing how to calculate TAM for your venture.
To calculate TAM, the total market size for a product or service must be identified first. This includes the number of potential customers and their geographic location. Data from relevant industry surveys, market research studies, and economic data can be used to estimate the potential market extent.
Once the market size is determined, the percentage of customers likely to purchase the product or service should be estimated. This can be done through consumer surveys, focus groups, and market studies.
Finally, the TAM is calculated by multiplying the size of the market by the potential percentage of consumers who will purchase the product or service.
Let’s look at two different examples.
Examples of TAM calculation
A company developing an email marketing tool wants to calculate its TAM. They start by identifying the total number of businesses that could benefit from email marketing services, considering both small and large enterprises globally.
If they estimate there are 10 million businesses that need email marketing tools and the average annual subscription price is $200, the TAM would be 10 million businesses multiplied by $200, equalling a TAM of $2 billion.
On the other side, a new fast-casual dining chain aims to calculate its TAM within the U.S. market.
They assess the total number of fast-casual dining visits by consumers annually is estimated to be 1 billion. If the average spend per visit is projected at $15, the TAM for the fast-casual dining chain would be 1 billion visits multiplied by $15, resulting in a TAM of $15 billion.
Why Is the Total Addressable Market Important?
When considering the potential of a new product or service, it is crucial to understand the total addressable market. By understanding TAM, companies can better assess the profitability of launching a new product or service and develop effective growth strategies.
1. TAM helps to identify opportunities
Calculating the total addressable market is an essential step for any business. TAM provides a comprehensive view of the potential revenue opportunity available in a particular market.
It helps companies gain insights into the size of the potential customer base, the competition they face, and the potential for revenue growth.
Knowing your TAM can help you plan marketing and sales strategies, target key customers, and prioritize investment decisions.
2. Provides better targeting and segmentation
One of the key benefits of understanding the total addressable market is the ability to identify and segment different customer groups.
By breaking down the TAM into smaller segments, businesses can gain a deeper understanding of their customers’ specific needs and preferences.
This enables you to create effective marketing campaigns and develop products that actually attract customers.
3. TAM enhances calculating market size
Another important reason for calculating TAM is to size the market opportunity accurately.
Understanding the size of the market and the potential revenue opportunity is a way to know which markets to prioritize.
How else would you know how much to invest in marketing and sales activities?
An accurate size estimate of the market helps you avoid over-investing in smaller markets or missing out on larger opportunities.
What Are The Best Total Addressable Market Strategies and Analysis?
The best TAM strategies involve analyzing the entire potential customer base and determining the best ways to target that market.
Let’s examine the five main ways companies calculate their total addressable market.
1. Top-down analysis
The top-down analysis begins with an assessment of the overall size of a market and then refines the analysis to more precisely identify potential customers.
The downside of this type of analysis is that it often relies on third-party data, which may not be the most reliable.
2. Bottom-up analysis
The bottom-up analysis starts by analyzing individual customer needs and preferences and then aggregates the data to determine the size and potential of the TAM.
Unlike the top-down approach, bottom-up analysis typically utilizes your own company’s data so that it may be more accurate.
3. Value theory analysis
Value theory analysis examines the perceived value of a product or service to customers and explores ways to enhance this value to expand the total addressable market.
Value theory is an excellent approach to take when you have no access to previous data, either internal or external.
By understanding what aspects of the product or service are most valuable to potential customers, businesses can strategically adjust their offerings or marketing to appeal to a broader audience. Thereby potentially increasing the size of their target market.
4. Leverage data
Data can help companies identify opportunities within their total addressable market.
It’s important to use data from various sources, including customer behavior, industry trends, and competitor performance.
Then, you can develop insights into where the most significant opportunities for growth lie.
5. Collaborate with partners
Partnering with other businesses can broaden your horizons and gain access to new markets.
You can seek partners to work towards a shared vision and benefit from their expertise, resources, and customer base.
Whether through a joint venture, distribution agreement, or strategic alliance, the goal is to find partners that complement your business and share your goals.
Additional Tips & Tricks
- Do not limit only to firmographic data while creating your TAM analysis. Information about your potential prospects’ intent and technographics will give you a better look at their buying intentions;
- Establishing a good product market fit can work in your favor when the total available market is not as large as you may have initially thought;
- The potential of a market is reflected in more than just its current size but also in the likelihood of its growth in the near future. Investing early could pay off in the long run;
- Focusing on a single market segment is a viable strategy to get your foot in the door and capture a larger market share.
The Bottom Line
TAM is a company’s maximum potential revenue opportunity from a product or service. It is one of the most important metrics to consider when evaluating a product or service. By understanding the total addressable market, entrepreneurs can make better-informed decisions and prepare their businesses for success.
You’ve learned the total addressable market, why it is important, and strategies for its calculation. Also, you’ve got a few tips & tricks in your pocket. With all this knowledge and information, you are able to determine whether TAM is the approach you need to undertake for your upcoming venture or brand.
Total Addressable Market FAQs
To put it simply, no, the two are not the same concept. The total available market is the likely value of a market to a company. In contrast, the market size represents a huge portion unlikely to be captured by a single company.
The importance of the total available market is fairly self-evident. It helps businesses determine how profitable delivering a specific product or service to customers may be.
Capturing a bigger market share is the goal of any ambitious business. How this goal can be achieved are practically unlimited, but implementing certain marketing approaches along with improvements to the customer experience and customer acquisition is a good start.
The serviceable available market (SOM) refers to a specific portion of the total open market that your products or services can reach. The serviceable available market is determined based on several factors but is commonly based on geographic proximity.
