Table of contents:-
- What is the Total Addressable Market (TAM)?
- Benefits of knowing Total Addressable Market
- How to calculate Total Addressable Market?
What is the Total Addressable Market (TAM)?
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 amount 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 important 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 give 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 can be generated from the market.
Whenever a business is considering 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 to break down these numbers to much easier, manageable levels while simultaneously providing a clear understanding of the gains that could potentially come in the future.
While calculating the TAM, it is crucial that the investor remains objective as any exaggeration may lead to higher investments in markets with less potential for growth and less Return on Investments (ROI). No entrepreneur or investor should ever look past the TAM of a new product or service before committing to them.
Total Addressable Market may also help discover markets with growth potential higher than what you could imagine. This data could also help secure more funds from investors which 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. This could also prevent any impulsive and under-thought decisions from the team members, which can prove to be costly down the line.
How to calculate Total Addressable Market?
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 any other parameters. The last step of narrowing down gives you a viable business opportunity.
Bottom-Up analysis involves starting with a small calculation and then expanding it up to a broader range. You may begin by analyzing a small base of buyers or use some research and then extrapolate it for a bigger audience.
This approach is best for new innovative products which have no significant data that could be used 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 can be reflected in the actual product pricing.
Q: What is the difference between Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM)?
A: 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 can be achieved realistically.
SOM is a subset of SAM which is itself a subset of TAM.
Q: How is Total Available Market related to Total Addressable Market?
A: Total Addressable Market and Total Available Market refer to the same concept.