What Is TAM (Total Addressable Market)?
Total Addressable Market Definition
TAM or the total addressable market refers to the maximum revenue opportunity available in the market for a product or service. You can measure Tam in terms of revenue and the number of companies that can become your customers in the future. The total addressable market is essential for startups as well as well-established enterprises.
The Total Addressable Market (TAM), also referred to as Total Available Market, refers to the overall revenue opportunity available for any product or service if it obtains a 100% market share.
It can be an accurate metric of the number of funds and resources a company should put into a new product or service.
Determining a product or service’s TAM is not a revenue projection. It is merely a way for companies to understand the size of the market currently.
Total Addressable Market is an essential concept for startups and existing businesses. The estimates such as effort and funding allow them to prioritize specific requirements, customer insights, and business opportunities.
The company executives can use TAM to provide a viable value proposition in areas where they feel the presence of potential buyers and investors.
Benefits of Knowing Total Addressable Market
Total Addressable Market helps startups and even established businesses estimate the potential sales and revenues that they can generate from the market.
Whenever a business considers embarking on a new opportunity or planning to cross-sell an existing product, it is crucial to calculate the Total Addressable Market.
The total addressable market helps break down these numbers at much easier, manageable levels while simultaneously providing a clear understanding of the gains that could potentially come in the future.
While calculating the TAM, the investor must remain objective as any exaggeration may lead to higher investments in markets with less potential for growth and less Return on Investments (ROI).
Before committing to them, no entrepreneur or investor should ever look past the TAM of a new product or service.
Total Addressable Market may also help discover markets with higher growth potential than you could imagine. This data could also help secure more funds from investors and could ultimately lead to much better returns.
Calculating the Total Addressable Market for a product or service also helps determine its validity and sheds light on the reality of the new venture.
Doing so could also prevent any impulsive and under-thought decisions from the team members, proving costly down the line.
How To Calculate TAM?
There are mainly three methods used to calculate the Total Addressable Market. They are:
Top-Down analysis involves starting with a large target market by taking the full number of people, businesses, etc., into consideration and then narrowing it down to a specific market segment based on demographics, geographical locations, or other parameters. The last step of narrowing down gives you a viable business opportunity.
The bottom-up analysis involves starting with a small calculation and then expanding it to a broader range.
You may begin by analyzing a small buyer base or using some research and then extrapolate it to a bigger audience.
This approach is best for new innovative products with no significant data that you could use against them.
It relies on the estimates for the value of the product provided by the customers, i.e., the amount they are willing to pay for it, and then analyzing how much of that you can reflect in the actual product pricing.
How To Do an Analysis of the Total Addressable Market?
We saw how we could calculate the total addressable market in the above point. And once you have the number of TAM for your company, you can analyze the following pointers for your business.
You can avail of several benefits if you conduct a total addressable market analysis. Such as:
- Alignment between sales and marketing teams will increase
- Annual territory planning will improve
- Helps you think beyond the current market
- TAM guides your go-to-market strategy
Why Do Investors Care About TAM?
Investors and venture capitalists care about the total addressable market of a company mainly because the TAM shows the company’s upside potential.
For example, investors will think twice before investing in a company with a total addressable market value of $ 100 million. Because in that case, building a billion-dollar business is not possible.
Investors care about the total addressable market, primarily in early-stage businesses.
In this case, investors will look for the overall number of customers in the specific market, mostly existing ones. The other point they will note is the likelihood of sales growth and the roadmap of product expansion. You can also use the product roadmap software to track the progress of your products.
Investors also look at the total addressable market for private equity firms and well-established enterprises.
You might ask why?
In such cases, the company’s growth stops because they aren’t able to acquire new customers.
Yes, the total addressable market is not the only concern that the investors look at while you raise capital. However, it is something that you must always consider.
Remember, the investor is not looking at the company’s growth six months down the line but six years from now.
How Do You Increase Your TAM?
With the total addressable market score, a company can estimate the worth of the market.
At the beginning of the growth stage, your first customers are very important. Therefore build a product that will solve the problems and work very well for these customers.
Once you reach the second growth stage, you have to build a product that appeals to one customer’s growth stage.
However, keep in mind that the product must also appeal to a larger audience.
In the third stage of growth, you must strategize and plan the ways to increase your total addressable market.
You have to still focus on the same problem but reach for wider customers.
If you are only considering your original customers and pleasing them with your products, you are stepping into your growth.
Following are the three ways you can increase your TAM:
- Expand to other available verticals
- Start with the higher end and follow it up with the down market.
To simplify, in B2C, some companies start with high-end products and slowly create less expensive and simpler versions of that product.
- This point is the opposite of the previous one. The other way to increase your total addressable market is to start at the lower end and expand upmarket.
For example, in B2B, some companies start by selling their products and services to small businesses. Later on, they expand to mid-sized businesses and enterprises.
To elaborate a little on the third point of expanding the upmarket, let’s look at the three ways you can do that:
- Find customers who have outgrown your product and left. Understand their needs, assess them with your products, and make changes accordingly.
- Understand the needs of your customers. Doing this will involve assessing the must-haves vs. nice have.
- Understand the difference between what you need to do and what reasons you can partner with other company.
The most common way to increase your TAM is to find a large group of customers and build products that solve their issues. However, you are taking a risk in this case because it is not scalable. You might build a product that will solve an issue for one company and not for another.
Pro tip: As product managers, you can build amazing products using tools like product management software.
TAM refers to the total demand for a product in the market calculated in terms of annual revenue.
SAM refers to the TAM served by your company’s product or service.
SOM is the percentage of SAM that you can achieve realistically. SOM is a subset of SAM which is itself a subset of TAM.
The consumer expenditure on food in the UK can be a good example of a total addressable market. The value of this market was 200 billion euros in 2014, which refers to the total addressable market.
The consumer food market contains alcoholic and non-alcoholic drinks and fresh foods.
Total addressable market and total available market refer to the same concept.